Tutorial Chapter 17 - 18 Accounting For Overhead Costs - Job Order and Process Costing

Copyright © 2014 Pearson Education 13 - 1
Ch 13 – Horngren et al 2014
Chapter 17: Tutorials
Accounting for
Overhead Costs
Presented by
Dr Noor Ajian Mohd Lair

Senior Lecturer
Mechaincal Engineering Program
Faculty of Engineering
Universiti Malaysia Sabah
Office No 43, 2nd floor

Ext: 3422
email: nrajian72@gmail.com
Example: Overhead Application
Enriquez Machine Parts Company selects a

single cost-allocation in each department for
applying overhead, machine hours in machining
and direct-labor in assembly.

Total overhead applied to a particular product

equals budgeted overhead rates multiplied by
actual machine hours (MH) or labor cost (LC)
used by that product.
Thus, we would apply $44 of overhead to a

product that uses 6 MH in machining and incurs
direct-labor cost of $40 in assembly.
Machining: 6 actual MH X $4 per MH= $24

Assembly: $40 of DL cost X 50% = 20
Total overhead $44

Suppose that at the end of the year Enriquez

had used 70,000 machine hours in Machining.
How much overhead was applied to Machining?

Suppose that at the end of the year Enriquez

had incurred $190,000 in direct labor cost.
How much overhead was applied to Assembly?

Total factory overhead applied:

Machining: $280,000
Assembly: 95,000
Total Factory Overhead Applied $375,000
The $375,000 is an estimate of Enriquez’s

overhead for the year, and it will become part of
the cost of goods sold expense on Enriquez’s
income statement when the units produced are
subsequently sold.

Example: Disposing of Underapplied
or Overapplied Overhead
Recall that Enriquez applied

$375,000 to its products, but . . .
it incurred $392,000 of actual

manufacturing overhead during the year.
$392,000 actual overhead

–375,000 applied overhead
$ 17,000 underapplied overhead
The $375,000 becomes part of Cost of Goods

Sold when the product is sold, however . . .
Example: Disposing of Underapplied
The applied overhead is $17,000 less

than the amount incurred. It is:
Overapplied overhead occurs when the

amount applied exceeds the amount incurred.
A company must report actual costs

incurred in its financial statements.
Disposing of Underapplied
Accountants uses two methods for the adjustment:
1) Write-off to cost of goods sold
2) Proration, apportioning over- or

underapplied overhead to cost of goods
sold, work-in-process inventory, and
finished-goods inventory in proportion to
the ending balances of each account.

Example: Immediate Write-Off
This method regards the $17,000 as a reduction in

current income and adds it to Cost of Goods Sold.
Manufacturing Overhead
392,000 - 375,000 = 17,000
Cost of Goods Sold

Applied
Overhead
(Budgeted)
Incurred
Overhead
(Actual)
Example: Prorating Among Inventories
This method prorates the $17,000 of

underapplied overhead to Work-In-Process (WIP),
Finished Goods, and Cost of Goods Sold accounts.
Companies generally prorate overhead

variances only when material.

Variable Versus Absorption Costing

Example: Variable & Absorption Costing
Methods
Basic Production Data at Standard Cost
Direct material $205

Direct labor 75
Variable manufacturing overhead 20
Standard variable costs per unit $300

Methods
The annual budget for fixed

manufacturing overhead is $1,500,000
Budgeted production is 15,000 computers.
Sales price = $500 per unit
$20 per computer is variable overhead.
Fixed S&A expenses = $650,000
Sales commissions = 5% of dollar sales

Methods
Actual product quantities are:
There are no variances from the standard variable

manufacturing or selling and administrative costs,
the actual fixed manufacturing overhead incurred is
$1,500,000 each year, and the actual fixed selling
and administrative cost is $650,000 each year.
Learning Example: Comparative Income
Objective 5
Statement Using Variable-Costing
Desk PC Division: Comparative Income Statements

Fixed-Overhead Rate
The fixed-overhead rate is the

amount of fixed manufacturing
overhead applied to each
unit of production.
Fixed overhead rate = budgeted fixed manufacturing overhead

expected volume of production
$1,500,000 ÷ 15,000 = $100

Example: Absorption-Costing
Learning
Objective 6 Method Comparative Income
Statement
Desk PC Division: Comparative Income Statements

Ch 14 – Horngren et al 2014
Chapter 18: Tutorials
Job-Order Costing and

Process-Costing Systems

Job-Order Costing System Example
Summary of Enriquez Machine Parts

Company Pertinent Transactions
December 31 inventories

Job-Costing System Example
Job-Order Costing, General Flow of Costs (in 000)

Learning Summary journal entries for the
Objective 2
a job-order costing system
Trace direct materials and direct labor costs to WIP.

Applying Factory Overhead Costs
Accountants trace actual direct materials

and direct labor costs to products, and apply
factory overhead costs to WIP via budgeted
(predetermined) overhead rates.
To charge actual overhead costs to

Factory Department Overhead:

To compute budgeted overhead rates, for each

department determine: 1) cost-allocation base,
2) budgeted overhead costs, and 3) budgeted
amount of each cost-allocation base.
Apply factory overhead costs to jobs:

Enriquez allocates overhead based on machine

hours in machining and direct-labor cost in
assembly, resulting in the following overhead
rates:

Applied overhead for 20X1 is $375,000
Summary journal entry:

Finished Goods, Sales, and Cost of Goods Sold
Transactions that recognize the completion of

production and the eventual sale of the goods.

Finished Goods, Sales, and Cost of Goods Sold
Assuming the use of the immediate write-off method

to dispose of under- or overapplied overhead:
The preceding seven transactions recorded direct

materials, direct labor, and factory overhead costs
incurred during 20X1. Costs flowed through WIP to
either Direct-Materials Inventory, WIP Inventory,
Finished-Goods Inventory, or Cost of Goods Sold.
Learning Activity-Based Costing in a
Objective 3
Job-Costing Environment
ABC increases costing accuracy by focusing

On the cause-and-effect relations between:
Work Consumption
performed of resources
(activities) (costs)

Example: ABC in a Job-Costing Environment
Dell focuses on the most critical (core)

processes across the value chain, the
design and production processes.
Dell then added the remaining phases of

the value chain, the functions (or core
processes) that add value to the
company’s products.
Dell assigns the costs of these functions

to an individual job under the current ABC
system.
Example: ABC in a Job-Costing Environment

Example: Application of Process Costing
The Oakville Wooden Toys company buys wood

as a direct material for its forming department,
which processes only one type of toy,
marionettes.
It inserts all the wood into this department at
the beginning of the process. After forming, the
company transfers the marionettes to the
finishing department where workers hand
shape them and add strings, paint, and
clothing.

The forming department had no beginning

inventory and completely manufactured 25,000
identical units during April, leaving no ending
inventory. Its costs that month were as follows:

Oakville Wooden Toys

Five key steps in the
Cost of Goods Sold calculation
Step 1: Summarize the flow of physical units.

Step 2: Calculate output in terms of equivalent units.
Step 3: Summarize the total costs to account for (apply
to WIP).
Step 4: Calculate equivalent unit costs .
Step 5: Apply costs to units completed and in ending
WIP.

How does a company measure output—

the results of the department’s work?
State output not in terms of physical

Step 2 units but in terms of a different unit
measure called an “equivalent unit.”
Equivalent units are the number of completed

(whole) units that the department could have
produced from the inputs applied.

Learning Example: Physical Units and
Objective 6
Equivalent Units
Determine equivalent units of partially

completed units by multiplying physical units by
the percent of completion to correctly equate
the completed units transferred out with the
partially completed units in ending inventory.

Learning Example: Calculation of Product
Objective 7
Costs
Step 3 summarizes the total costs to account for (that is,

the total costs incurred and applied to WIP—Forming).
Step 4 obtains unit costs by dividing the two categories

of total costs by the appropriate measures of equivalent
units. The unit cost of a completed unit = materials cost
plus conversion costs per equivalent unit.
Step 5 then uses unit costs to apply costs to products.

Finished units are complete in terms of both direct materials
and conversion costs. Multiply the full unit cost times the
number of completed units to determine unit cost.

Example: Calculation of Product Costs
Forming Department Production Cost Report

Example: Journal Entries

Example: Effects of Beginning
Inventories: Weighted-Average
Method
Forming Department Output in Equivalent Units,
Weighted-Average Method

Weighted-Average Method Example
Forming Department Production-Cost report,

Weighted-Average Method

Backflush Costing Example
Speaker Technology, Inc., recently

introduced backflush costing and JIT.
July Production for Model AX27 :

Standard material cost: $14
Standard conversion cost: $21
Actual production for the month: 400 units

Actual materials purchased: $5,600
Actual conversion costs: $8,400

Backflush costing is accomplished in three steps:


Charge any remaining balance in the account

at the end of an accounting period to Cost of
Goods Sold.
Write off the $200 balance in the conversion
costs account to Cost of Goods Sold at the end
of the month:

THE END

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Copyright © 2014 Pearson Education 13 - 1

Chapter 17: Tutorials

Dr Noor Ajian Mohd Lair

Office No 43, 2nd floor

Enriquez Machine Parts Company selects a

Copyright © 2014 Pearson Education 13 - 3

Total overhead applied to a particular product

Thus, we would apply $44 of overhead to a

Machining: 6 actual MH X $4 per MH= $24

Copyright © 2014 Pearson Education 13 - 4

Suppose that at the end of the year Enriquez

How much overhead was applied to Machining?

Copyright © 2014 Pearson Education 13 - 5

Suppose that at the end of the year Enriquez

How much overhead was applied to Assembly?

Copyright © 2014 Pearson Education 13 - 6

Total factory overhead applied:

The $375,000 is an estimate of Enriquez’s

Copyright © 2014 Pearson Education 13 - 7

Recall that Enriquez applied

it incurred $392,000 of actual

$392,000 actual overhead

The $375,000 becomes part of Cost of Goods

The applied overhead is $17,000 less

Overapplied overhead occurs when the

A company must report actual costs

Accountants uses two methods for the adjustment:

1) Write-off to cost of goods sold

2) Proration, apportioning over- or

Copyright © 2014 Pearson Education 13 - 10

This method regards the $17,000 as a reduction in

Cost of Goods Sold

This method prorates the $17,000 of

Companies generally prorate overhead

Copyright © 2014 Pearson Education 13 - 12

Copyright © 2014 Pearson Education 13 - 13

Basic Production Data at Standard Cost

Direct material $205

Copyright © 2014 Pearson Education 13 - 14

The annual budget for fixed

Budgeted production is 15,000 computers.

Sales price = $500 per unit

$20 per computer is variable overhead.

Fixed S&A expenses = $650,000

Sales commissions = 5% of dollar sales

Actual product quantities are:

There are no variances from the standard variable

Desk PC Division: Comparative Income Statements

Copyright © 2014 Pearson Education 13 - 17

The fixed-overhead rate is the

Fixed overhead rate = budgeted fixed manufacturing overhead

$1,500,000 ÷ 15,000 = $100

Copyright © 2014 Pearson Education 13 - 18

Copyright © 2014 Pearson Education 13 - 19

Chapter 18: Tutorials

Job-Order Costing and

Copyright © 2014 Pearson Education 14 - 20

Summary of Enriquez Machine Parts