To illustrate a job costing system, this section describes the transactions for the month of July for Creative Printers. The company ABC expects to incur the manufacturing overhead cost of $100,000 with the 20,000 machine hours for a whole year. It does not represent an asset, liability, expense, or any other element of financial statements. Amounts go into the account and are then transferred out to other accounts. Recording the application of overhead costs to a job is further illustrated in the T- accounts that follow.
Overapplied overhead example
Assume Creative Printers is a company run by agroup of students who use desktop publishing to produce specialtybooks and instruction manuals. Creative Printers uses job costing.Creative Printers keeps track of the time and materials (mostlypaper) used on each job. In a journal entry, we will do entries for eachletter labeled in the chart — where the arrow is pointing TO is ourdebit and where the arrow is coming FROM is our credit. Here is avideo discussion of job cost journal entries and then we will do anexample. Examples includehome builders who design specific houses for each customer andaccumulate the costs separately for each job, and caterers whoaccumulate the costs of each banquet separately.
The Four Key Steps of Assigning Costs
Hershey likely uses a process costing system since it produces identical units of product in batches employing a consistent process. Process costing systems require the use of work-in-process inventory accounts for each process. Thus Hershey would track production costs using separate work-in-process inventory accounts for each stage of production.
Chapter 5 LO 5 — Prepare Journal Entries for a Process Costing System
- On the other hand, the underapplied overhead is the result of the applied manufacturing overhead cost is less than the actual overhead cost that incurs during the accounting period.
- Prepare journal entries to assign the materials, labor, and manufacturing overhead costs to production and to record the transfer of Job No. 100 to Finished Goods Inventory.
- Review these illustrations carefully before moving on to the next section.
- Job 16 had 875 machine-hours so we would charge overhead of $1,750 (850 machine-hours x $2 per machine-hour).
Work in process begins with the first stage of production (mixing and blending), continues with the second stage (bottling), and ends with the third stage (inspecting, labeling, and packaging). When products have gone through all three stages of production, they are shipped to a warehouse, and the costs are entered into finished goods inventory. Once products are delivered to retail stores, product costs are transferred from finished goods inventory to cost of goods sold.
Direct Labor
➢ Identify the three elements of cost incurred in manufacturing a product and indicate the distinguishing characteristics of each. Boeing Company is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Boeing provides products and services to customers in 150 countries and employs 165,000 people throughout the world. Using a simple example to explain https://www.business-accounting.net/ this concept, assume 30 students attend school and each takes half a full load of classes. Content of the memo must include the name and title of the person interviewed, name of the company, date of the interview, and information responding to the questions above. Sales revenues for January were $45,000; cost of goods sold was $30,000 for Job No. 211 that was in Finished Goods Inventory on 2010 January 1.
Direct Labor Paid by All Production Departments
If the expected level of activity in a production center is 50,000 machine-hours and the estimated overhead costs are $750,000, what is the predetermined overhead rate? For example, Job 105 had revenue of USD9,000 and costs of USD 5,500.Third, managers would compare actualoverhead on the left side of the Overhead account, with theoverhead applied to jobs on the right side. If the actual overheadexceeds the applied overhead, they may wish to learn why the actualoverhead is so high. Also, they may ask the accountants to increasethe overhead applied to jobs to give them a better idea of the costof jobs. If the actual is less than the applied overhead, they mayask the accountants to reduce the overhead applied to jobs. The company assigns overhead to each job onthe basis of the machine-hours each job uses.
Journalizing Costs Assigned to Units Completed and Transferred
Second, the manufacturing overhead account tracks overhead costs applied to jobs. The overhead costs applied to jobs using a predetermined overhead rate are recorded as credits in the manufacturing overhead account. You saw an example of this earlier when $180 in overhead was applied to job 50 for Custom Furniture Company.
Kelley manufactures base paint in two separate departments—Mixing and Packaging. The following information is for the Mixing department for the month of March. Figure 3.6 “Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department” presents the cost per equivalent unit calculation for Desk Products’ Assembly department. Later in step 3, we will use equivalent unit information for the Assembly department to calculate the cost per equivalent unit. This step shows that 3,000 units were in WIP inventory on May 1 and 6,000 units were started during May. These 9,000 units will end up in one of two places, either completed and transferred out (to the Finishing department) or not completed and therefore in ending WIP inventory.
Manufacturing overhead costs incurred, other than indirect materials and indirect labor, were depreciation, $60,000, and heat, light, power, miscellaneous, $30,000 (to be paid next month). Notice, Job 105 has been moved from FinishedGoods Inventory since it was sold and is now reported as an expensecalled Cost of Goods Sold. Also, did you notice that actualoverhead came to $9,800 ($1,000 indirect materials + $2,000indirect labor + $6,800 other overhead from transaction g) but weapplied $9,850 in overhead to the jobs in transaction d? Wheneverwe use an estimate instead of actual numbers, it should be expectedthat an adjustment is needed. We will discuss the differencebetween actual and applied overhead and how we handle thedifferences in the next sections.
A more likely outcome is that the applied overhead will not equal the actual overhead. The following graphic shows a case where $100,000 of overhead was actually incurred, but only $90,000 was applied. Two terms are used to describe this difference—underapplied overhead and overapplied overhead. Kelley Paint Company uses the weighted average method to account for costs of production.
Recall from Chapter 1 that manufacturing overhead consists of all costs related to the production process other than direct materials and direct labor. Because manufacturing overhead costs are difficult to trace to specific jobs, the amount allocated to each job is based on an estimate. The process of creating this estimate requires the calculation of a predetermined rate. Notice, Job 105 has been moved from Finished Goods Inventory since it was sold and is now reported as an expense called Cost of Goods Sold.
C This must match total costs to be accounted for shown in Figure 3.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department”. Although not an issue in this example, rounding the cost per equivalent unit may cause minor differences between the two amounts. A This column represents actual physical units accounted for before converting to equivalent units. Identify whether each business listed in the following would use job costing or process costing.
Likewise, it needs to compare the applied manufacturing overhead cost with the actual cost that occurs during the period to determine whether the overhead has been overapplied or underapplied before making an adjusting entry. For example, in January 2021, the manufacturing company ABC uses $1,500 of the indirect raw materials and $1,000 of indirect labor cost. Other indirect production costs, including depreciation, utilities, insurance, property tax, maintenance and repairs, have the total amount of $6,000.
As you’ve learned, the actual overhead incurred during the year is rarely equal to the amount that was applied to the individual jobs. Thus, at year-end, the manufacturing overhead account often has a balance, indicating overhead was either overapplied or underapplied. Overhead costs incurred other than indirect labor and indirect materials were depreciation, $6,000, and utilities, fuel, and miscellaneous, $6,000. Overhead costs incurred other than indirect labor and indirect materials were depreciation, $3,000, and utilities, fuel, and miscellaneous, $3,000. After this journal entry, the balance of manufacturing overhead remains $500 (8,500 – 8,000) on the debit side of the ledger.
For example, Creative Printers recentlylearned that cookbooks were not profitable. On the other hand,printing instruction manuals was quite profitable, so the companyhas focused more on the instruction manual market. To illustrate ajob costing system, this section describes the transactions for themonth of July for Creative Printers. Although this approach is not as common as simply closing the manufacturing accountant for startups overhead account balance to cost of goods sold, companies do this when the amount is relatively significant. Figure 3.8 “Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department” shows the flow of costs through the work-in-process inventory T-account for the Assembly department. Recall that Desk Products, Inc., has two departments—Assembly and Finishing.
The company can make the journal entry for overapplied overhead by debiting the manufacturing overhead account and crediting the cost of goods sold account at the period end adjusting entry. Exercise E At the end of the second week in March, Job No. 710 has an accumulated total cost of $37,800. In the third week, $9,000 of direct materials were used on Job 710, 300 hours of direct labor were charged to the job at $40 per hour, and manufacturing overhead was applied on the basis of $40 per machine-hour for overhead.
