NORMAL COSTING & PREDETERMINED OVERHEAD

COST ACCOUNTING AND CONTROL

NORMAL COSTING
• Assigns actual direct material and direct labor to products but allocated manufacturing
overhead to products using a predetermined rate.
COSTING SYSTEMS

PREDETERMINED OVERHEAD RATE

• An allocation rate used to apply the estimated manufacturing overhead to cost objects (e.g.,
products) for a specific reporting period.
• Why are predetermined overhead rates used in product costing?
 Improve timeliness of information. Facilitate overhead assignment during a period as
goods are produced or sold and services are rendered.
 Overcome the problem of fluctuations in activity levels that do not impact fixed
overhead costs.
 Allow uniform costing (adjust for variations in actual overhead costs) whatever
season or circumstance the company is into.
• FORMULA FOR PREDETERMINED OVERHEAD RATE
Total Budgeted OH Cost at a Specified Activity Level
Predetermined overhead rate =
Volume of Specified Activity Level

UNDERAPPLIED AND OVERAPPLIED OVERHEAD

• Actual OH Cost > Applied OH Cost = Underapplied
 • Actual OH Cost < Applied OH Cost = Overapplied

DISPOSITION OF UNDERAPPLIED AND OVERAPPLIED OVERHEAD

• Disposition depends on the materiality of the amount involved.
• If material/significant – it should be prorated among the accounts in which OH resides: (1)
Work-In-Process Inventory; (2) Finished Goods Inventory; and (3) Cost of Goods Sold.
• If immaterial/insignificant – it should be closed to Cost of Goods Sold only.
• What is the effect on Cost of Goods Sold?

At year-end 2023, Dub’s Wind Generator Co. had a P40,000 debit balance in its Manufacturing
Overhead account. Overhead is applied to products based on direct labor cost. Relevant
account balance information at year-end follows:

a. What predetermined OH rate was used during the year?

b. Prepare the journal entry to close the overhead account balance, assuming it is:
• Material/Significant.
• Immaterial/Insignificant.
JOB-ORDER COSTING
JOB-ORDER COSTING SYSTEM
• In job-order costing system, the jobs or batches of products or services are the cost objects. All
manufacturing costs incurred are assigned to jobs.
• A job-order costing system is appropriate in a situation in which most costs incurred for the job can
be readily identified with specific customers, contracts, or projects.
• Job-order costing systems are often found in medium to small firms that produce for customer
order.
Flow of costs in job-order costing in a manufacturing firm
FLOW OF DOCUMENTS IN A JOB-ORDER COSTING SYSTEM IN A MANUFACTURING
COMPANY
• Customer’s PO
• Sales Order
A sales order is prepared as a basis for issuing …
• Production Order
A production order initiates work on a job, whereby costs are charged through …
• Materials requisition form (A)
• Direct labor time ticket (B)
• Predetermined overhead rates
These production costs are accumulated on a form, prepared by the accounting department
known as a
• Job Cost Sheet (C) – used to compute unit product costs that in turn are used to value
ending inventories and to determine cost of goods sold.