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Overhead is applied using a predetermined overhead rate, which is based on budgeted (estimated) costs and volume. The budgeted figure is used solely in the.
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Hilton Chapter 3 Adobe Connect
We change gears dramatically in managerial accounting. Because of the limited time we have, we do not cover many advanced concepts.
An overview of the material we will cover
Cost behavior (Chapters 2 and 6) Different cost accounting systems Job-order or product costing (Chapter 3) Process costing (Chapter 4) Activity-based-costing (ABC) (Chapter 5) Cost-volume-profit (CVP) (Chapter 7) Balance scorecard only (Chapter 1 2 ) Decision Making (Chapter 14) Chapters 7 and 14, important topics for MBA students, will be disproportionately weighted on the final exam.
Job-order (product) costing (Chapter 3) Distinct production jobs that are significantly different. Usually job-order or batch production Costs are accumulated by job or batch o Project costing refers to job costing in a nonmanufacturing environment. "Jobs" in this case refer to cases, contracts, and/or programs.
Process costing (Chapter 4) Used by firms with large numbers of identical units Usually continuous production Costs are accumulated by department
Hybrid costing systems, e.g., Operation Costing Batch environment Conversion costs similar across product lines, Direct materials and direct labor significantly different across product lines
These methods have been used for a long time, and they are well-established in companies. In Chapter 5, we will introduce a third method, Activity Based Costing (ABC).
INVENTORIES For manufacturing firms, the following are costs are accumulated: Raw materials inventory Work-in-process inventory o Direct materials o Direct labor o Manufacturing overhead Indirect materials Indirect labor Other Finished-goods inventory Cost of goods sold
Product Costing and Cost Accumulation in a Batch Production Environment
The purpose of the cost accounting system is to assign manufacturing costs to units produced. Direct materials Direct labor Manufacturing overhead
OVERHEAD
Overhead is incurred during the period. It is usually charged to (debited to) the account Manufacturing Overhead as overhead is incurred.
Overhead Application Generally, overhead is allocated during a period using a predetermined overhead rate ( budgeted overhead / budgeted activity ) When applied, Manufacturing Overhead account is credited This process is called normal costing in the chapter
Predetermined manufacturing overhead rate per unit of activity
= Budgeted (estimated, predicted) total manufacturing overhead cost for the year
Budgeted (predicted) units of activity (1)
(1) E.G., direct labor hours, machine hours
A single overhead rate is commonly known as a plantwide rate; Multiple rates are often known as departmental rates. Overhead is applied using some type of cost driver (discussed in much more depth in Chapter 5) o Direct labor has been a very common and appropriate cost driver. Past processes were labor intensive. o Today, many processes are automated and less dependent on labor. Thus, firms now use machine hours , process time ,^ throughput (cycle) time (the average amount of time to convert raw materials into finished goods), and other measures as cost drivers. o Overhead may be allocated in a two-stage cost allocation process (discussed in much more depth in Chapter 5)
Incurrence of actual overhead Overhead costs are recorded during the period as incurred and charged to a manufacturing overhead account
End of Period Adjustment: Applied overhead versus actual overhead Adjusting the overapplied or underapplied overhead at the end of the accounting period
Manufacturing Overhead Debited for actual overhead costs incurred
Credited for overhead applied , using predetermined overhead rate
(1) Ending balance (2) Ending balance
(1) If actual overhead is greater than the amount applied, then the overhead is under-applied (2) If actual overhead is less than the amount applied, then the overhead is over- applied.
At period-end, the amount of over (under) applied is zeroed out and allocated (prorated) among Work in process inventory Finished goods inventory Cost of goods sold
Overhead is applied using a predetermined overhead rate, which is based on budgeted (estimated) costs and volume. The budgeted figure is used solely in the determination of the predetermined rate.
Over/Under-applied overhead is the difference between actual overhead and applied overhead.
Vocabulary Estimated = budgeted Applied = allocated Incurred = actual
Predetermined OH Rate, Over/Underapplied OH
The following data pertain to the Oneida Restaurant Supply Co. for the year just ended.
Budgeted sales revenue $205, Actual manufacturing overhead $340, Budgeted machine hours (based on practical capacity) 10, Budgeted direct-labor hours (based on practical capacity) 20, Budgeted direct-labor rate $ Budgeted manufacturing overhead $364, Actual machine hours 11, Actual direct-labor hours 18, Actual direct-labor rate $
*Budgeted direct-labor cost = 20,000 ´x $14 = $280,
2 .
Actual manufacturing overhead
-
Applied manufacturing overhead
=
(overapplied) or underapplied overhead
(a) $340,000 – (11,000)($36.40) = $60,400 overapplied overhead
(b) $340,000 – (18,000)($18.20) = $12,400 underapplied overhead
(c) $340,000 – ($270,000†)(130%)
= $11,000 overapplied overhead
†Actual direct-labor cost = 18,000 ´x $15 = $270,