Learning Objectives

Prepare journal entries

Prepare Cost of Goods Manufactured and Cost of Goods Sold
Determine and close the over/underapplied Factory Overhead

PROCESS COST SYSTEM - used when a manufacturer maintains a continuous output of homogeneous products fo
JOB ORDER COST SYSTEM - used when the output consists of special or custom-made products

PREDETERMINED OVERHEAD RATES

It is a cost per unit of the allocation base used to charge overhead to products.

JOURNAL ENTRIES

ACCOUNT TITLE DR CR
Raw Materials Inventory xx ACQUISITION OF MATERIALS
Accounts Payable xx
Purchase of raw materials on account

Work in Process Inventory (Direct Materials)

Factory Overhead (Indirect Materials)
Raw Materials Inventory MATERIALS ISSUED/USED IN TH
Issuance of raw materials into production
LABOR COSTS INCURRED
Work in Process Inventory (Direct Labor) xx
Factory Overhead (Indirect Labor) xx FACTORY OVERHEAD COSTS IN
Wages Payable xx
Incurred labor costs

Factory Overhead xx
Various Accounts xx
Recognized various factory overhead expenses for the period

Work in Process Inventory xx PRODUCTS ARE COMPLETED/F

Factory Overhead xx
Application of Factory Overhead

Finished Goods Inventory xx

 Work in Process Inventory xx
Transferred cost of goods completed.

Accounts Receivable xx SALE OF PRODUCTS

Sales xx

Cost of Goods Sold xx

Finished Goods Inventory xx
Recorded sales and transferred cost of goods sold.

With Payroll Account

Payroll xx
Wages Payable xx

Wages Payable xx
Cash xx
Recorded and paid payroll.

Work in Process Inventory xx

Factory Overhead xx
Selling and Administrative Expenses xx
Payroll xx
Distributed payroll to appropriate accounts
 of homogeneous products for stock
ade products

PRODUCTION PROCESS

ITION OF MATERIALS

ALS ISSUED/USED IN THE PRODUCTION

COSTS INCURRED

Y OVERHEAD COSTS INCURRED/APPLIED

CTS ARE COMPLETED/FINISHED

F PRODUCTS
Dep'n Exp.
Accum. Dep.
Problem 1
Gray Corporation had the following transactions during its first month of operations:
1.      Purchased raw materials on account, P 85,000.
2.      Raw materials of P 30,000 were requisitioned to the factory. An analysis of the materials requisition slips indica
3.      Factory labor costs incurred were P 95,000 of which P 84,000 pertained to factory wages payable and P 11,000
4.      Time tickets indicated that P 80,000 was direct labor and P 15,000 was indirect labor.
5.      Overhead costs incurred on account were P 96,000.
6.      Manufacturing overhead was applied at the rate of 150% of direct labor cost.
7.      Goods costing P 115,000 are still incomplete at the end of the month; the other goods were completed and trans
8.      Finished goods costing P 90,000 to manufacture were sold on account for P 120,000.

Raw Materials Inventory 85000

Accounts Payable 85000

Work in Process Inventory 24000 Work in Process Inventory

Factory Overheas 6000 24000 109000
Raw Materials Inventory 30000 80000
120000
Payroll 95000 224000 109000
Wages Payable 84000 115000 Work in Process, end
Payroll Taxes Payable 11000 224000 224000

Work in Process Inventory 80000

Factory Overhead 15000
Payroll 95000

Factory Overhead 96000

Accounts Payable 96000

Work in Process Inventory 120000

Factory Overhead 120000

Finished Goods Inventory 109000

Work in Process Inventory 109000

Accounts Receivable 120000

Sales 120000

Cost of Goods Sold 90000

Finished Goods Inventory 90000
requisition slips indicated that P 6,000 was classified as indirect materials.
payable and P 11,000 pertained to employer payroll taxes payable.

re completed and transferred to finished goods.

Work in Process, end

Problem 1
The following information has been gathered for the GHI Manufacturing Company for its fiscal year ending Decemb
Actual Manufacturing Overhead Cost P 212,500
Actual Direct Labor Hours 54,900
Actual Direct Labor Costs P 445,000
Estimated Manufacturing Overhead Costs P 210,000
Estimated Direct Labor Costs P 434,000
Estimated Direct Labor Hours 56,000

What is the predetermined manufacturing overhead rate per direct labor

Predetermined MOH rate 3.75 per DLH

What is the predetermined manufacturing overhead rate based on DL Costs

Predetermined MOH rate 0.483871

48.39% of DL Costs
Problem 2
The predetermined manufacturing overhead rate for 2010 was P4.00 per direct
labor hour; employees were paid P5.00 per hour. If the estimated direct labor
cost was P75,000, what was the estimated manufacturing overhead?

Estimated DL Costs DL rate x Estimated DLH

Estimated DLH 15000

Predetermined MOH rate Estimated MOH Costs

Estimated Allocation Base
Estimated MOH Costs 60000
Problem 3

The Silver Company uses a predetermined overhead rate in applying overhead to

production orders on a labor cost basis in Department A and on a machine hours basis in
Department B. At the beginning of the year, the company made the following estimates:

Dept. A Dept. B
Direct Labor Cost P 60,000 P 40,000 P45000
Factory Overhead P 90,000 P 45,000 15000 MH
Direct Labor Hours 6,000 9,000
Machine Hours 2,000 15,000

What predetermined overhead rate would be used in Department A and Department B respectively? 

Dept. A Dept. B
Predetermined OH rate 150% of DL Costs P3 per MH

Problem 4
Tillman Corporation uses job costing and has two production departments, M and A. Budgeted manufacturing costs f

Dept. M Dept. A
Direct Materials P 700,000 P 100,000
Direct Labor 200,000 800,000
Factory Overhead 600,000 400,000
300% of D50% of DL cost
The actual direct material and direct labor costs charged to Job. No. 432 during the year were as follows:

Direct Material P 25,000

Direct Labor
Department M 8,000
Department A 12,000 20,000

Tillman applies manufacturing overhead to production orders on the basis of

direct labor cost using departmental rates predetermined at the beginning of the
year based on the annual budget. The total cost associated with Job. No. 432
for the year should be 

DirectMaterials 25000 ACTUAL

Direct Labor 20000 ACTUAL
Applied FOH: predetermined OH rate x actual alloc. Base
Department M: 300% x 8000 24000
Department A: 50% x 12000 6000 30000 APPLIED
Total Costs of Job 432 75000
fiscal year ending December 31:

15000 MH
geted manufacturing costs for the year are as follows:

ere as follows:
 4.43 4.44

Predetermined overhead rate 455,600

33,500 Direct Materials (Actual)
13.6 per DLH Material A
Material B
a. Factory overhead 1,800 Direct Labor (Actual)
Prepaid Insurance 1,800 Factory overhead (Applied)
Total Manufacturing Costs
b. Selling and Administrative expense 1,025
Accum. Depreciation 1,025 Actual FOH
Applied FOH
c. Materials Inventory 336 Underapplied FOH
Accounts Payable 336
4.49
d. Factory overhead 6,510
Cash 6,510 Applied FOH = Predetermined FOH rate X Actua

e. Payroll 160,000 Predetermined overhead rate

Cash 160,000

Work in Process Inventory 140,000

Factory overhead 20,000 Direct Materials, beg
Payroll 160,000 Add: Purchases
Total Materials Avail. For Use
f. Factory overehead 6,270 Less: Direct Materials Used
Cash 6,270 Direct Materials, end

g. Materials Inventory 24,500 Actual FOH

Accounts Payable 24,500 Applied FOH
Overapplied FOH
h. Work in Process Inventory 18,500 *adjust to COGS
Factory overhead 1,600 FOH
Materials 20,100 COGS

i. Selling and Administrative expense 5,660 Direct Materials

Accounts Payable 5,660 Direct Labor
Factory overhead
j. Factory overhead 3,505 Total Manufacturing Costs
Accum. Depreciation 3,505 Add: Work in Process, beg.
Total Goods put into Process
k. Selling and Administrative expense 2,650 Less: Work in Process, end
Cash 2,650 Cost of Goods Manufactured
divided by units produced
l. Work in Process Inventory 40,800 Product Cost/unit
 Factory overhead 40,800

m. Finished Goods Inventory 64,000

Work in Process Inventory 64,000
Applied FOH
n. Accconts Receivable 56,410 900,600
Sales 56,410 237,000

Cost of Goods Sold 47,860 Predetermined FOH rate

Finished Goods Inventory 47,860

Actual FOH 39,685

Applied FOH 40,800
Overapplied FOH (1,115)

To charge overapplied FOH to Cost of Goods Sold

Factory overhead 1,115

Cost of Goods Sold 1,115

HEADING

Materials Inventory, beg. -

Add: Purchases 24,836
Total Materials Avail. For Use 24,836
Less: Materials Inventory, end 4,736 MANUFACTURING
Materials used 20,100 Materials, end
Less: Indirect Materials 1,600 Work in Process, end
Direct Materials used 18,500 Finished goods, end
Direct Labor 140,000 Ending Inventory
Factory Overhead 40,800
Total Manufacturing Costs 199,300
Add: Work in Process Inventory, beg. -
Total Cost of Goods put into process 199,300
Less: Work in Prcocess Inventory, end 135,300
Cost of Goods Manudfactured 64,000

HEADING

Finished Goods Inventory, beg. -

Add: Cost of Goods Manufactured 64,000
Total Goods Available for Sale 64,000
Less: Finished Goods Inventory, end 16,140
Cost of Goods Sold 47,860
Less: Overapplied FOH 1,115
Adjusted Cost of Goods Sold 46,745
 HEADING

Sales 56,410
Less: Cost of Sales 46,745
Gross Profit 9,665
Less: Operating Expenses
Selling and Adminatrative Expenses 9,335
Operating Income 330
 A. Materials Inventory
JOB X JOB Y Accounts Payable

8,000 16,000 b. Work in Process Inventory-Job X

3,000 8,000 Work in Process Inventory-Job Y
22,000 15,000 Factory Overhead
50,600 36,800 Materials Inventory
83,600 75,800
c. Payroll
90,500 Wages Payable
87,400
3,100 Increase in the COGS Work in Process Inventory-Job X
Work in Process Inventory-Job Y
Factory Overhead
Payroll
ermined FOH rate X Actual Alloc. Base
d. Factory Overhead
900,600 Utilities Payable
237,000 Accum.Deprection
3.8 380% of DL Costs Prepaid Insurance

36,500 e. Work in Process Inventory-Job X

55,000 Work in Process Inventory-Job Y
91,500 Factory Overhead
54,600
36,900 f. Finished Goods Inventory
Work in Process Inventory- Job X
894,700
900,600 Work in Process, end (Total manufacturing Costs of Job Y)
(5,900)

5,900
5,900
JOB X13 JOB X14 JOB X15
16,380 24,220 14,000
105,000 84,000 48,000
399,000 319,200 182,400
520,380 427,420 244,400
41,000 - -
561,380 427,420 244,400 Adjustment (close the underapplied FOH)
- 427,420 244,400 671,820
561,380 - - Cost of Goods Sold
100 Factory Overhead
5,613.8
 Adjustment (close the overapplied FOH)

Factory Overhead
Cost of Goods Sold
predetermined FOH x actual allocation base
PFOH rate x 237,000
237,000 Over/underapplied FOH

900,600 If immaterial, charge to Cost of Goods Sold

237,000
3.8 380% of DL Costs IF material, charge to Cost of Goods Sold, Finished Goods, and

FOH
1,800 40,800
6,510
20,000
6,270
1,600
3,505
39,685 40,800
1,115
40,800 40,800

4,736
135,300
16,140
156,176
 31000
31000

11000
24000
39000
74000

65000
65000

22000
15000
28000
65000

23500
3000
18000
2500

50600
36800
87400

83600
83600

nufacturing Costs of Job Y) 75800

Factory Overhead
39000 87400
28000
23500
90500 87400
3100
90500 90500

3100
3100
 0
0

Goods Sold

oods Sold, Finished Goods, and Work in Process Inventory (proration)

Problem 4-31
Problem 4-32
Problem 4-33
TREATMENT OF OVER/UNDERAPPLIED FACTORY OVERHEARD

A. Immaterial
Charge to Cost of Goods Sold

B. Material
Charge to Work in Process, Finished Goods, and Cost of Goods Sold

PROBLEM 3

Bailey's Corporation applies overhead based upon machine-hours. Budgeted factory overhead
was P325,000 and budgeted machine-hours were 13,000. Actual factory overhead was
P312,330 and actual machine-hours were 12,660. Before disposition of over- or underapplied
overhead, the cost of goods sold was P725,000 and ending inventories were as follows:

Work in Process 150,000

Finished Goods 375,000

Required:
a. Compute the amount of overhead applied to production.
b. Prepare the journal entry to dispose of the over/under-applied overhead using the write-off to cost of goods sold ap
c. Prepare the journal entry to dispose of the over/under-applied overhead using the proration approach. 
 PROBLEM 1
Danner Corporation applies overhead based upon machine-hours. Budgeted factory o
was P375,000 and budgeted machine-hours were 12,500. Actual factory overhead wa
and actual machine-hours were 13,150.

a. Compute the overhead application rate.

b. Compute the amount of overhead applied to production.
c. Determine the amount of over- or underapplied overhead. 

PROBLEM 2

Shawano Corporation applies overhead based upon machine-hours. Budgeted factory

was P266,400 and budgeted machine-hours were 18,500. Actual factory overhead wa
and actual machine-hours were 19,050. Before disposition of over- or underapplied o
the cost of goods sold was P560,000 and ending inventories were as follows:

rite-off to cost of goods sold approach. Direct Materials 60,000

oration approach.  Work in Process 190,000
Finished Goods 250,000
Required:
a. Compute the amount of overhead applied to production.
b. Prepare the journal entry to dispose of the over/under-applied overhead using the w
c. Prepare the journal entry to dispose of the over/under-applied overhead using the p
hine-hours. Budgeted factory overhead
00. Actual factory overhead was P387,920

achine-hours. Budgeted factory overhead

00. Actual factory overhead was P287,920
ition of over- or underapplied overhead,
ntories were as follows:

er-applied overhead using the write-off to cost of goods sold approach.

er-applied overhead using the proration approach.