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UNDER- AND OVERAPPLIED OVERHEAD
Since predetermined overhead rates are based on estimated data, at the end of an accounting period overhead costs are usually either underapplied or overapplied. In the example, overhead is underapplied by $10,000, which can be determined by examining the balance in the Manufacturing Overhead account: Manufacturing Overhead (b) 24,000 300,000 (h) Actual (c) 85,000 Applied Overhead (d) 40, Overhea d Costs (e) 16,000 Costs (g) 145, 310,000 300, Under- applied Bal .
The difference of $10,000 between the actual overhead costs and the applied overhead costs in this case is called underapplied overhead because actual overhead costs exceeded the overhead costs that were applied to inventory. Alternatively, the amount of the under- or overapplied overhead can be determined as follows: Actual overhead costs incurred............... $310, Applied overhead costs (150% × $200,000).............................................
Underapplied overhead........................... $10,
JOB-ORDER COSTING EXAMPLE (cont’d)
- Disposition of under- or overapplied overhead. a. Close the balance in Manufacturing Overhead to Cost of Goods Sold: Cost of Goods Sold....................................... 10, Manufacturing Overhead..................... 10, or b. Allocate the balance in Manufacturing Overhead among Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the amount of overhead applied during the period in each account at the end of the period. (The figures below are given.) Overhead applied during the current period in the ending balance of: Work in Process............................. $24,000 8 % Finished Goods.............................. 36,000 12 Cost of Goods Sold........................ 240,000 80 Total.............................................. ................................................... ...................................................
The journal entry to record the allocation of the underapplied overhead of $10,000 would be: Work in Process (8% of $10,000).................. 800 Finished Goods (12% of $10,000)................. 1, Cost of Goods Sold (80% of $10,000)........... 8, Manufacturing Overhead..................... 10,
JOB-ORDER COSTING EXAMPLE (cont’d)
- Reeder Company’s income statement for the year (assuming that the underapplied overhead is closed directly to Cost of Goods Sold) would be: Reeder Company Income Statement Sales.................................................. ........................................................ ........................................................
Cost of goods sold ($600,000 + $10,000)..........................................
Gross margin..................................... 290, Less selling and administrative expenses: Wage and salary expense................ $90, Insurance expense........................... 4, Advertising expense........................ 100, Depreciation expense...................... 15,000 209, Net operating income........................ $81, Reeder Company Schedule of Cost of Goods Sold Beginning finished goods inventory.........................................
Add: Cost of goods manufactured...... 650, Goods available for sale..................... 690, Ending finished goods inventory........ 90, Unadjusted cost of goods sold........... 600, Add: Underapplied overhead............. 10, Adjusted cost of goods sold............... $610,
COST FLOWS IN A JOB-ORDER COSTING SYSTEM
(Exhibit 3-14)
