FOH - 2 Factory overheads

8/21/2019 FOH - 2 Factory overheads

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Management Accounting Fundamentals

By: Naveed Ahmad Mughal

Accountingfor FOH


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Activity Based Costing (ABC)

ABC measures a variety of different factory

activities and their relationship to overhead cost

Used in companies where overhead rate cannot be

ascertained on the commonly used bases Designed to take into account all the different cost

and distribute them as accurately as possible to the

products

This approach is best when the company hassignificant nonvolume-related costs in its plant which

are not caused by traditional cost drivers such as

labor hours and machine hours.


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Activity Based Costing (contd)

ABC Steps

Identify activities

Group activities into activity centers

Collect costs associated with activity centersinto cost pools

Cost pools are usually organized bycategories

Examples: Unit-level, Batch-level, Product-level,and Factory level activities

Identify a cost driver for each category


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Applying Manufacturing Overhead

Allocation of manufacturing overhead is

conducted in two steps:

Estimated overhead costs are computed by

departments and recorded on job cost sheets

Total overhead accumulated is charged to

production by posting it to the Work in

Process account in the general ledger


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Entries in the General Ledger

At the end of the month entries are made in the

general ledger

Posting to departmental manufacturing

overhead accounts A credit balance represents over-applied overhead

A debit balance represents under-applied overhead


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Accounting for Actual and

Applied Factory Overhead

Entry to apply estimated factory overhead to

production

Work in Process XXApplied Factory Overhead XX

At the end of the period, the applied factory overheadaccount is closed to factory overhead.

Applied Factory Overhead XX

Factory Overhead Control XX


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Flow of Entries to Record Applied

Overhead Costs


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Overapplied or Underapplied

Overhead Monthly procedure

Balance of the manufacturing overhead

account are closed at the end of each month

in the general ledger

It represents the cumulative overapplied or

underapplied overhead to date


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Overhead (contd) End-of-year procedures

Both overapplied and underapplied overhead

must be closed

As it is difficult to allocate these costs into

various manufacturing stagescosts are

allocated to Cost of Goods Sold only


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Overhead (contd) Examples of closing entries

Overapplied costs:

Overapplied Manufacturing Overhead dr.

Cost of Goods Sold cr. Underapplied costs

Cost of Goods Sold dr.

Underapplied Manufacturing Overhead cr.


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Control of Manufacturing

Overhead Costs The method used to record manufacturing

overhead cost depends on:

Size of the company

How it is organized

Types of products manufactured

Account in use: Manufacturing Overhead

Control account in the general ledger


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Departmentalization of

Overhead Separate control accounts

Maintain a control account for each different

manufacturing overhead cost

Single control accounts

Subsidiary ledger by type of cost

Subsidiary ledger by department


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Recording Overhead Costs

Voucher register entries

Invoice comparison with purchase order

Preparation of voucher including a notation of

department to be charged Distribution memorandum indicates how the cost is

to be distributed

Enter into voucher register upon approval

Charge the cost to the appropriatedepartmental overhead analysis sheet


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Recording Overhead Costs

(contd) General journal vouchers

Most manufacturing overhead costs include

fixed costs

Involves the preparation of a schedule of

monthly fixed overhead costs

The schedule is attached to the journal voucher

and posted to departmental overhead analysis

sheet.


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Summary Schedule of

Departmental Costs Schedule shows the total amount of each

type of cost incurred in each department

Prepared at the end of each month

Subsidiary ledger should agree with its related

control account


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Allocating Overhead to Jobs

Overhead cost must be associated with

products or jobs

This ensures that the transfer will parallel the

work flow

First stepdistributing overhead costs to

departments


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Recording Overhead

Distribution in the General

Ledger At the end of the month the distribution of

overhead costs is entered in the general

ledger

Manufacturing overhead control is closed into

separate departmental overhead accounts

Distribution of service department costs arejournalized in the order of allocation

Fl f E t i t R d Di t ib ti f


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Flow of Entries to Record Distribution of

Overhead Costs


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Distributing Service Department

Factory Overhead Costs Service departments are an essential part of the

organization, but they do not work directly on theproduct.

Production departments perform the actual

manufacturing operations that physically changethe units being processed.

The costs of the service departments must beapportioned to the production departments.

An analysis of the service departmentsrelationship to other departments is necessary.

Costs should be distributed in proportion toservices provided


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Common Bases for Distributing

Service Department Costs

Service Departments Basis for Distribution

Building Maintenance Floor space occupied by other departments

Inspection and Packing Production volume

Machine Shop Value of machinery and equipment

Human Resources Number of workers in departments served

Purchasing Number of purchase orders

Shipping Quantity and weight of items shipped

Stores Units of materials requisitioned

Tool Room Total direct labor hours in departments served


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Methods of Distributing Costs

1. Direct Distribution Method Service department costs are allocated only to

production departments.

2. Sequential Distribution or Step-Down Method

Distributes service department costs regressively toother service departments and then to productiondepartments.

3. Algebraic Distribution Method Distributes costs by simultaneous equations

recognizing the relationship of services rendered byservice departments to each other.

FOH - 2 Factory overheads

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