Agenda
Introductions
Professor
Students
Course understanding assessment
Accounting Internship – one success story from SLU
Handouts
Overview of class
Class schedule – more accelerated than last term
Test Schedule
Video – what is Managerial Accounting
Lecture Chapters 1 & 2
Where are we headed with the course outline?
Chapter 1 is an overview of managerial (“cost”) accounting – accounting for internal users. Very basic and limited lecture
Chapters 2, 3 & 4 are focused on the accurate cost information for each cost component. The first test covers chapters 1-4
Chapters 5 & 6 reviews the impact of production on expenses and profitability. Including the important CVP analysis.
Chapter 7 focuses on incremental analysis and the Make or Buy decision process. Test 2 will cover chapters 5-7.
Chapter 8 takes us into pricing models and we will NOT use the material from the textbook. Leads to your written assignment and you should not miss this class.
Chapter 9 begins the Budget planning faces and the fear begins for some students. Do NOT fall behind in this section as the Chapter 10 section on Static Budgets and Chapter 11 on Standard Costs will be very difficult.
Chapter 12 is focused on Capital Investments
What is TEAM COMPETITION and how does it impact my grade and success probability on test?
Next Week’s Student Assignments
(due on January 22nd)
If your last name begins with A-L, turn in Problem 2-5A.
If your last name begins with M – Z, turn in Problem 2-4B
Hint: 2 students will present the assigned answers for the above as a validation they have worked & understand the problems.
What is Lydia’s House of St. Louis?
The first test is after only four chapters and this is an easy chance to start off with a strong grade.
Last term the average score on the1st test was 91%
Bring a calculator and paper for the Team Competition
Chapter 1
Managerial Accounting
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain the distinguishing features of managerial accounting.
[2] Identify the three broad functions of management.
[3] Define the three classes of manufacturing costs.
[4] Distinguish between product and period costs.
[5] Explain the difference between a merchandising and a manufacturing income statement.
[6] Indicate how cost of goods manufactured is determined.
Preview of Chapter 1
Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
Managerial Accounting is a field of accounting that provides economic and financial information for managers and other internal users. These concepts originated mostly from manufacturing operations.
Managerial accounting applies to all types of businesses.
Corporations
Proprietorships
Partnerships
Not-for-profit
Managerial Accounting Basics
LO 1 Explain the distinguishing features of managerial accounting.
Comparing Managerial and Financial Accounting
Illustration 1-1
Managerial Accounting Basics
LO 2 Identify the three broad functions of management.
Management Functions
Planning
Maximize short-term profit and market share.
Commit to environmental protection and social programs.
(Electric cars in Seattle)
Add value to the business.
Directing
Controlling
Coordinate diverse activities and human resources.
Implement planned objectives.
Provide incentives to motivate employees
Hire and train employees.
Produce smooth-running operation.
Keeping activities on track.
Determine whether goals are met.
Decide changes needed to get back on track.
May use an informal or formal system of evaluations.
Managerial Accounting Basics
LO 2 Identify the three broad functions of management.
Business Ethics
All employees are expected to act ethically.
Many organizations have codes of business ethics.
Past financial frauds:
Enron,
Global Crossing,
WorldCom
Managerial Accounting Basics
Our own internal Travel Expense reporting Ethics
LO 2 Identify the three broad functions of management.
Business Ethics
Creating Proper Incentives
Systems and controls sometimes create incentives for managers to take unethical actions.
Controls need to be effective and realistic.
Should I accept Delta’s offer to fly to Seattle for Boeing event?
Managerial Accounting Basics
SLU Accounting Intern uncovers fraud.
Two arrests & $147k recovery of funds.
LO 2 Identify the three broad functions of management.
Business Ethics
Sarbanes-Oxley Act (SOX)
Clarifies management’s responsibilities.
Requires certifications by CEO and CFO.
Selection criteria for Board of Directors & Audit Committee.
Substantially increased penalties for misconduct.
Code of Ethical Standards
Managerial Accounting Basics
Managers should ask questions such as the following.
What costs are involved in making a product or providing a service?
If we decrease production volume, will costs decrease?
What impact will automation have on total costs?
How can we best control costs? And do we really understand the cost?
Look at your refrigerator and the placement of the hinges – the option for right side versus left side and the related cost savings.
Manufacturing Costs
LO 3 Define the three classes of manufacturing costs.
Manufacturing consists of activities and processes that convert raw materials into finished goods.
Manufacturing Costs
Manufacturing Costs
Direct Materials
Raw Materials
Basic materials and parts used in manufacturing process.
LO 3 Define the three classes of manufacturing costs.
Direct Materials
Raw materials that can be physically and directly associated with the finished product during the manufacturing process.
Manufacturing Costs
Indirect Materials
Not physically part of the finished product or they are an insignificant part of finished product in terms of cost.
Considered part of manufacturing overhead.
Look at your next bill for having your car serviced? Is there a small fee for “miscellaneous and incidental supplies”.
LO 3 Define the three classes of manufacturing costs.
Direct Materials
Manufacturing Costs
Work of factory employees that can be physically and directly associated with converting raw materials into finished goods.
Indirect Labor
Work of factory employees that has no physical association with the finished product or for which it is impractical to trace costs to the goods produced.
LO 3 Define the three classes of manufacturing costs.
Direct Labor
Manufacturing Costs
Costs that are indirectly associated with manufacturing the finished product.
Includes all manufacturing costs except direct materials and direct labor.
Also called factory overhead, indirect manufacturing costs, or burden.
LO 3 Define the three classes of manufacturing costs.
Manufacturing Overhead
Manufacturing Costs
Components:
Costs that are an integral part of producing the product.
Recorded in “inventory” account.
Not an expense (COGS) until the goods are sold.
LO 4 Distinguish between product and period costs.
Product Costs
Direct materials
Direct labor
Manufacturing overhead
Product Versus Period Costs
Charged to expense as incurred, regardless of production
Non-manufacturing costs such annual insurance
Includes all selling and administrative expenses.
LO 4 Distinguish between product and period costs.
Period Costs
Product Versus Period Costs
LO 4 Distinguish between product and period costs.
Illustration 1-3
Product Versus Period Costs
LO 4 Distinguish between product and period costs.
A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, wheel nuts, spokes, salary of factory manager, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, or overhead.
Direct Materials
Tires.
Spokes.
Handlebars.
Direct Labor
Overhead
Salaries of employees who put tires on the wheels.
Factory depreciation.
Factory manager salary.
Factory maintenance employees salary.
Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.
However, a merchandise company will have cost of goods purchased instead of cost of goods manufactured.
LO 5 Explain the difference between a merchandising and a manufacturing income statement.
Income Statement
“COGS”
Manufacturing Costs in Financial Statements
Cost of Goods Sold Components – (Periodic Inventory System)
LO 5
Illustration 1-4
Cost of Goods Manufactured
Manufacturing Costs in Financial Statements
Cost of goods sold sections of merchandising and manufacturing income statements
Illustration 1-5
LO 5 Explain the difference between a merchandising and a manufacturing income statement.
Manufacturing Costs in Financial Statements
a. $450,000.
b. $500,000.
c. $550,000.
d. $600,000.
For the year, Red Company has cost of goods manufactured of $600,000, beginning finished goods inventory of $200,000, and ending finished goods inventory of $250,000. The cost of goods sold is
Review Question
LO 5 Explain the difference between a merchandising and a manufacturing income statement.
Beg. Inventory $200,000
+ COGs Manufactured 600,000
Goods Available for Sale 800,000
End. Inventory 250,000
Cost of Goods Sold $550,000
Manufacturing Costs in Financial Statements
Determining the Cost of Goods Manufactured
Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period.
Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year.
LO 6 Indicate how cost of goods manufactured is determined.
Illustration 1-6
Manufacturing Costs in Financial Statements
Illustration 1-8
Illustration 1-7
TEST ITEM
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.
Illustration 1-8
Inventory accounts for a manufacturer
The balance sheet for a merchandising company shows just one category of inventory.
Balance Sheet
Manufacturing Costs in Financial Statements
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.
Illustration 1-9
Current assets sections of merchandising and manufacturing balance sheets
Balance Sheet
Manufacturing Costs in Financial Statements
. economy, in general, has shifted toward an emphasis on providing services rather than goods.
Over 50% of . workers are now employed by service companies.
Trend is expected to continue in the future.
Most of the techniques learned for manufacturing firms are applicable to service companies.
Product Costing For Service Industries
LO 7 Explain the difference between a merchandising and a manufacturing balance sheet.
Manufacturing Costs in Financial Statements
Notice the comment “fare”. The cost to fly is more than just the “fare”.
Refers to all business process associated with providing a product or service.
For a manufacturing firm these include the following:
LO 8 Identify trends in managerial accounting.
Focus on the Value Chain
Illustration 1-12
Managerial Accounting Today
Just-In-Time Inventory Methods
Inventory system in which goods are manufactured or purchased just in time for sale.
LO 8 Identify trends in managerial accounting.
Reduce defects in finished products, with the goal of zero defects.
Total Quality Management (TQM)
Managerial Accounting Today
Theory of Constraints
Constraints (“bottlenecks”) limit the company’s potential profitability.
A specific approach to identify and manage these constraints in order to achieve company goals.
LO 8 Identify trends in managerial accounting.
Software programs designed to manage all major business processes. SAP, Oracle, Cognos and others.
Enterprise Resource Planning (ERP)
Managerial Accounting Today
Activity-Based Costing (ABC)
Allocates overhead based on use of activities.
Results in more accurate product costing and scrutiny of all activities in the value chain.
Chapter 4 & example with Monsanto’s Roundup bottling operation.
Evaluates operations in an integrated fashion.
Uses both financial and non-financial measures.
Links performance to overall company objectives.
Balanced Scorecard
LO 8 Identify trends in managerial accounting.
Managerial Accounting Today
End Introduction and Chapter 1
Chapter 2
Job Order Costing
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain the characteristics and purposes of cost accounting.
[2] Describe the flow of costs in a job order cost system.
[3] Explain the nature and importance of a job cost sheet.
[4] Indicate how the predetermined overhead rate is determined and used.
[5] Prepare entries for jobs completed and sold.
[6] Distinguish between under- and over applied manufacturing overhead.
Managerial Accounting (previously called “Cost Accounting”) is a field of accounting that provides economic and financial information for managers and other internal users. These concepts originated mostly from manufacturing operations.
Managerial accounting applies to all types of businesses.
Corporations
Proprietorships
Partnerships
Not-for-profit
Managerial Accounting Basics
How might this be used in “Not-for-Profit organizations?
Preview of Chapter 2
Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
Cost Accounting involves:
Measuring,
Recording, and
Reporting product costs.
Accounts are fully integrated into the general ledger.
Perpetual inventory system provides immediate, up-to-date information.
Two basic types: (1) a job order cost system and (2) a process cost system.
Cost Accounting Systems
LO 1 Explain the characteristics and purposes of cost accounting.
Job Order Cost System
Costs are assigned to each job or batch.
Key feature: Each job or batch has its own distinguishing characteristics.
Objective: Compute the cost per job. (accurate costing information is critical to the success of a company)
Measures costs for each job completed – not for set time periods.
Cost Accounting Systems
LO 1 Explain the characteristics and purposes of cost accounting.
Illustration 2-1
Cost Accounting Systems
LO 1 Explain the characteristics and purposes of cost accounting.
Used when a large volume of similar products are manufactured - (cereal, refining of petroleum, production of ice cream).
Costs are accumulated for a time period – (week or month).
Costs are assigned to departments or processes for a specified period of time.
Process Cost System
Cost Accounting Systems
LO 1 Explain the characteristics and purposes of cost accounting.
LO 1 Explain the characteristics and purposes of cost accounting.
Cost Accounting Systems
Illustration 2-2
Cost accounting involves the measuring, recording, and reporting of:
a. Product costs.
b. Future costs.
c. Manufacturing processes.
d. Managerial accounting decisions.
Review Question
LO 1 Explain the characteristics and purposes of cost accounting.
Cost Accounting Systems
The cost flow parallels the physical flow of the materials as they are converted into finished goods
Manufacturing costs are assigned to Work in Process (WIP).
Cost of completed jobs is transferred to Finished Goods.
When units are sold, the cost is transferred to Cost of Goods Sold.
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
Illustration 2-3
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
It is the assignment of the cost to work in process that is critical and a key part of this process.
Accumulating Manufacturing Costs
Raw Material Costs
Illustration: Wallace Company purchases 2,000 lithium batteries (Stock No. AA2746) at $5 per unit ($10,000) and 800 electronic modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000). The entry to record this purchase on January 4 is:
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
Factory Labor Costs
Consists of three costs:
Gross earnings of factory workers,
Employer payroll taxes on these earnings, and
Fringe benefits incurred by the employer.
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
Illustration: Wallace incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in February. The entry to record factory labor for the month is:
Jan. 31 Factory Labor 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
Factory Labor Costs
Many types of overhead costs
For example, property taxes, depreciation, insurance, and repairs.
Costs unrelated to manufacturing process are expensed.
Costs related to manufacturing process are accumulated in Manufacturing Overhead.
Manufacturing overhead subsequently assigned to work in process.
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
Manufacturing Overhead Costs
Manufacturing Overhead Costs
Illustration: Using assumed data, the summary entry for manufacturing overhead in Wallace Manufacturing Company is:
Jan. 31 Manufacturing Overhead 13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
LO 2 Describe the flow of costs in a job order cost system.
Job Order Cost Flow
During the current month, KRT Company incurs the following manufacturing costs:
(a) Raw material purchases of $4,200 on account.
Incurs factory labor of $18,000. Of that amount, $15,000 relates to wages payable and $3,000 relates to payroll taxes payable.
Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500.
Prepare journal entries for each type of manufacturing cost.
LO 2 Describe the flow of costs in a job order cost system.
Manufacturing costs are assigned to Work in Process with
Debits to Work in Process Inventory
Credits to Raw Materials Inventory
Factory Labor
Manufacturing Overhead
LO 3 Explain the nature and importance of a job cost sheet.
Assigning Manufacturing Costs to Work in Process
Job Order Cost Flow
Job Cost Sheet (rarely a paper flow in today’s society)
Used to record costs chargeable to specific jobs.
Constitutes the subsidiary ledger for the work in process account.
Each entry to a Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Illustration 2-4
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Assigned to a job when materials are issued
Materials requisition slip
Written authorization for issuing raw materials.
May be directly issued to use on a job - direct materials.
May be considered indirect materials – part of manufacturing overhead.
LO 3 Explain the nature and importance of a job cost sheet.
Assigning Manufacturing Costs to WIP
Raw Material Costs
Job Order Cost Flow
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Illustration 2-5
Assigning Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is:
Jan. 31 Work in Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
LO 3
Job Order Cost Flow
Assigning Raw Materials Cost
The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory.
Illustration 2-6
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Assigned to jobs on the basis of time tickets
Time tickets are prepared when the work is performed
Time tickets indicate
Employee
Hours worked
Account and job charged
Total labor cost
Factory Labor Costs
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Illustration 2-7
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Illustration: The time tickets are later sent to the payroll department, which applies the employee’s hourly wage rate and computes the total labor cost. If the $32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is:
Jan. 31 Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Factory Labor Costs
Jan. 31 Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
LO 3
Job Order Cost Flow
Factory Labor Costs
Job Cost Sheets – Direct Labor
The sum of the direct labor columns of the job cost sheets should equal the direct labor debited to Work in Process Inventory.
Illustration 2-8
LO 3
Job Order Cost Flow
The source documents for assigning material and factory labor costs to job cost sheets are:
a. Invoices and time tickets.
b. Invoices and payroll register.
c. Materials requisition slips and payroll register.
d. Materials requisition slips and time tickets.
Review Question
LO 3 Explain the nature and importance of a job cost sheet.
Job Order Cost Flow
Relates to production operations as a whole.
Cannot be assigned to specific jobs based on actual costs incurred.
Companies assign to work in process and to specific jobs on an estimated basis through the use of a …
Manufacturing Overhead Costs
LO 4 Indicate how the predetermined overhead rate is determined and used.
Predetermined Overhead Rate
Job Order Cost Flow
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
LO 4 Indicate how the predetermined overhead rate is determined and used.
Job Order Cost Flow
Predetermined Overhead Rate
Established at the beginning of the (budget) 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
Illustration 2-9
LO 4 Indicate how the predetermined overhead rate is determined and used.
Job Order Cost Flow
Predetermined Overhead Rate
Assigned to Work in Process during the period to get timely information about the cost of a completed job.
Illustration 2-10
LO 4 Indicate how the predetermined overhead rate is determined and used.
Job Order Cost Flow
Manufacturing Overhead Costs
This means that for every dollar of direct labor, Wallace will assign _______ of manufacturing overhead to a job.
LO 4 Indicate how the predetermined overhead rate is determined and used.
Illustration: Wallace uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, compute the overhead rate.
$280,000 $350,000 = 80%
80 cents
Job Order Cost Flow
Manufacturing Overhead Costs
LO 4 Indicate how the predetermined overhead rate is determined and used.
Illustration: Wallace applies manufacturing overhead to work in process when it assigns direct labor costs. Calculate the amount of applied overhead assuming direct labor costs were $28,000.
$28,000 x 80% = $22,400
The following entry records this application.
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
Job Order Cost Flow
Manufacturing Overhead Costs
Manufacturing Overhead Costs
The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (., applied) to Work in Process Inventory.
Illustration 2-11
LO 4
Job Order Cost Flow
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.
Illustration 2-12
LO 4 Indicate how the predetermined overhead rate is determined and used.
Job Order Cost Flow
Manufacturing Overhead Costs
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
LO 4 Indicate how the predetermined overhead rate is determined and used.
Job Order Cost Flow
Test your understanding
Review your pre-work on Problem 2-1A
Assigning Costs to Finished Goods
LO 5
When a job is completed, the costs are summarized and the job cost sheet is completed.
Illustration 2-14
Job Order Cost Flow
Illustration: When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory.
Jan. 31 Finished Goods Inventory 39,000
Work in Process Inventory 39,000
LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
Assigning Costs to Finished Goods
Illustration: On January 31 Wallace Manufacturing sells on account Job 101. The job cost $39,000, and it sold for $50,000. The entries to record the sale and recognize cost of goods sold are:
Jan. 31 Accounts Receivable 50,000
Sales revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000
LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
Assigning Costs to Cost of Goods Sold
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
LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
LO 5
Job Order Cost Flow
Summary
Illustration 2-15
Illustration 2-16
LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
Summary
While service companies do not have inventory, the techniques of job order costing are still quite useful in many service-industry environments. Consider, for example, the Mayo Clinic (health care), PricewaterhouseCoopers (accounting), and Goldman Sachs (investment banking).
Job Order Costing for Service Companies
LO 5 Prepare entries for jobs completed and sold.
Job Order Cost Flow
Advantages
More precise in assignment of costs to projects than process costing.
Provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs.
LO 5 Prepare entries for jobs completed and sold.
Disadvantage
Requires a significant amount of data entry.
Job Order Cost Flow
Shows manufacturing overhead applied rather than actual overhead costs.
Applied overhead is added to direct materials and direct labor to determine total manufacturing costs
Illustration 2-17
LO 6
Reporting Job Cost Data
Partial Income Statement
Illustration 2-18
Reporting Job Cost Data
LO 6 Distinguish between under- and over applied manufacturing overhead.
LO 6 Distinguish between under- and over applied manufacturing overhead.
Under- or Over applied Overhead (Hint – this is a key test concept)
A debit balance in manufacturing overhead means that overhead is under applied.
A credit balance in manufacturing overhead means that overhead is over applied.
Illustration 2-19
Reporting Job Cost Data
Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold. Most organizations will adjust their overhead rates in a quarterly or monthly period.
GAAP rules requires adjustments of overhead rates if your variances related to profit exceed a certain percentage.
Under applied overhead is debited to COGS
Over applied overhead is credited to COGS
LO 6 Distinguish between under- and over applied manufacturing overhead.
Reporting Job Cost Data
Under- or Over applied Overhead
Illustration: Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the over-applied overhead is:
Dec. 31 Manufacturing Overhead 2,500
Cost of Good Sold 2,500
Under- or Over applied Overhead
LO 6 Distinguish between under- and over applied manufacturing overhead.
Reporting Job Cost Data
For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month, Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor. Actual overhead incurred was $119,000. Compute the amount of manufacturing overhead applied during the month. Determine the amount of under- or over applied manufacturing overhead.
Manufacturing overhead applied
Under applied manufacturing overhead
(140% x $80,000) = $112,000
($119,000 - $112,000) = $7,000
LO 6 Distinguish between under- and over applied manufacturing overhead.
