Business Publishing, Business Publishing, Introduction to Management Accounting Introduction to Management Accounting 14/e, 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgsta Horngren/Sundem/Stratton/Schatzberg/Burgsta Accounting for Accounting for Overhead Costs Overhead Costs Introduction to Management Introduction to Management Accounting Accounting Chapter Chapter 13 13
Introduction to Management Accounting. Chapter 13. Accounting for Overhead Costs. Learning Objective 1. Accounting for Factory Overhead. Methods for assigning overhead costs to the products is an important part of accurately measuring product costs. - PowerPoint PPT Presentation
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Accounting for Factory OverheadAccounting for Factory Overhead
Methods for assigning overhead costsMethods for assigning overhead coststo the products is an important part ofto the products is an important part ofaccurately measuring product costs.accurately measuring product costs.
1. Select one or more cost drivers.1. Select one or more cost drivers.2. Prepare a factory overhead budget.2. Prepare a factory overhead budget.3. Compute the factory overhead rate.3. Compute the factory overhead rate.4. Obtain actual cost-driver data.4. Obtain actual cost-driver data.5. Apply the budgeted overhead5. Apply the budgeted overhead to the products.to the products.6. Account for any differences between the6. Account for any differences between the amount of actual and applied overhead.amount of actual and applied overhead.
Overhead rates are Overhead rates are budgeted; they are budgeted; they are estimates. The budgeted estimates. The budgeted rates are used to apply rates are used to apply overhead based on actual overhead based on actual events.events.
Illustration of Overhead ApplicationIllustration of Overhead Application
The company’s budgeted manufacturing overheadThe company’s budgeted manufacturing overheadfor the machining department is $277,800.for the machining department is $277,800.
Budgeted machine hours are 69,450.Budgeted machine hours are 69,450.
The budgeted overhead application rate is:The budgeted overhead application rate is:$277,800 ÷ 69,450 = $4 per machine hour$277,800 ÷ 69,450 = $4 per machine hour
Enriquez Machine Parts Company selects a Enriquez Machine Parts Company selects a single cost-allocation in each department for single cost-allocation in each department for applying overhead, machine hours in applying overhead, machine hours in machining and direct-labor in assembly.machining and direct-labor in assembly.
Illustration of Overhead ApplicationIllustration of Overhead Application
Suppose that at the end of the year EnriquezSuppose that at the end of the year Enriquezhad used 70,000 hours in Machining.had used 70,000 hours in Machining.
How much overhead was applied to Machining?How much overhead was applied to Machining?
Choice of Cost-Allocation BasesChoice of Cost-Allocation Bases
No one cost –allocation base is right for all situations.No one cost –allocation base is right for all situations.
The accountant’s goal is to find the cost-The accountant’s goal is to find the cost-allocation base that best links cause and effect.allocation base that best links cause and effect.
Disposing of Underapplied Disposing of Underapplied or Overapplied Overheador Overapplied Overhead
Suppose that Enriquez appliedSuppose that Enriquez applied$375,000 to its products.$375,000 to its products.
Also, suppose that Enriquez actually incurred $392,000 Also, suppose that Enriquez actually incurred $392,000 of actual manufacturing overhead during the year.of actual manufacturing overhead during the year.
$392,000 actual $392,000 actual ––375,000375,000 applied applied $ 17,000 Underapplied$ 17,000 Underapplied
The $375,000 becomes part of Cost of The $375,000 becomes part of Cost of Goods Sold when the product is sold. The Goods Sold when the product is sold. The $17,000 must also become an expense.$17,000 must also become an expense.
Disposing of Underapplied Disposing of Underapplied or Overapplied Overheador Overapplied Overhead
The applied overhead is The applied overhead is $17,000 less than the $17,000 less than the amount incurred. It is:amount incurred. It is:
Overapplied overhead occurs when Overapplied overhead occurs when the amount applied exceeds the the amount applied exceeds the amount incurred.amount incurred.
This method regards the $17,000 as a This method regards the $17,000 as a reduction in current income and adds it reduction in current income and adds it to Cost of Goods Sold.to Cost of Goods Sold.
Prorating Among InventoriesProrating Among Inventories
This method prorates the $17,000 of This method prorates the $17,000 of underapplied overhead to Work-In Process (WIP),underapplied overhead to Work-In Process (WIP),Finished Goods, and Cost of Goods Sold accountsFinished Goods, and Cost of Goods Sold accountsassuming the following ending account balances:assuming the following ending account balances:
Work-in-Process InventoryWork-in-Process Inventory $ 155,000$ 155,000Finished Goods InventoryFinished Goods Inventory 32,000 32,000Cost of Goods SoldCost of Goods Sold 2,480,000 2,480,000
Variable Versus Absorption CostingVariable Versus Absorption Costing
Variable costing excludes fixed manufacturing Variable costing excludes fixed manufacturing overhead from the cost of products.overhead from the cost of products.
Absorption costing includes fixed manufacturing Absorption costing includes fixed manufacturing overhead in the cost of products.overhead in the cost of products.
There are no variances from the There are no variances from the standard variable manufacturing costs, standard variable manufacturing costs, and the actual fixed manufacturing and the actual fixed manufacturing overhead incurred is exactly overhead incurred is exactly $1,500,000. $1,500,000.
Variable- Costing Method Variable- Costing Method Cost of Goods Sold Cost of Goods Sold
Variable expenses:Variable expenses:Variable manufacturing costVariable manufacturing cost of goods soldof goods sold Opening inventory, atOpening inventory, at – – $ 900$ 900
standard costs of $300standard costs of $300Add: variable cost of goodsAdd: variable cost of goods manufactured at standard,manufactured at standard, 17,000 and 14,000 units 17,000 and 14,000 units 5100 5100 4200 4200
Available for sale, 17,000 units Available for sale, 17,000 units 5100 5100 5100 5100Ending inventory, at $300Ending inventory, at $300 900 900¹¹ 300 300²²Variable manufacturingVariable manufacturing cost of goods soldcost of goods sold $4200$4200 $4800$4800
(thousands of dollars)(thousands of dollars) 20X7 20X7 20X8 20X8
¹3,000 units × $300 = $900,000 ²1,000 units × $300 = $300,000
Beginning inventoryBeginning inventory $ –$ – $1,200$1,200Add: Cost of goods manufacturedAdd: Cost of goods manufactured
at standard, of $400at standard, of $400** 6,800 6,800 5,600 5,600Available for saleAvailable for sale $6,800$6,800 $6,800$6,800Deduct: Ending inventoryDeduct: Ending inventory 1,200 1,200 400 400Cost of goods sold, at standardCost of goods sold, at standard $5,600$5,600 $6,400$6,400
(thousands of dollars) 20X7 20X8
Absorption-Costing Method Absorption-Costing Method Cost of Goods Sold Cost of Goods Sold
Absorption-Costing Method Absorption-Costing Method Comparative Income StatementComparative Income Statement
*Based on expected volume of production of 15,000 units:*Based on expected volume of production of 15,000 units: 20X7: (17,000 – 15,000) × $100 = $200,000 F20X7: (17,000 – 15,000) × $100 = $200,000 F 20X8: (14,000 – 15,000) × $100 = $100,000 U20X8: (14,000 – 15,000) × $100 = $100,000 U1From Cost of Goods Sold previous calculation1From Cost of Goods Sold previous calculation
SalesSales $7,000$7,000 $8,000$8,000Cost of goods sold, at standardCost of goods sold, at standard 5,6005,6001 6,4006,40011
Gross profit at standardGross profit at standard $1,400$1,400 $1,600$1,600Production-volume varianceProduction-volume variance** 200 200 F F 100 100 U UGross margin or gross profit “actual”Gross margin or gross profit “actual” $1,600$1,600 $1,500$1,500Selling and administrative expensesSelling and administrative expenses 1,000 1,000 1,050 1,050Operating income, variable costingOperating income, variable costing $ 600$ 600 $ 450$ 450
In practice, the production-volume varianceIn practice, the production-volume varianceis usually called simply the volume variance.is usually called simply the volume variance.
LearningLearningObjective 6Objective 6
A production-volume variance appears when actual A production-volume variance appears when actual production deviates from the expected volume of production production deviates from the expected volume of production
used in computing the fixed overhead rate.used in computing the fixed overhead rate.
There is no production-volume variance for variable overhead. There is no production-volume variance for variable overhead. The production-volume variance for fixed overhead arises becauseThe production-volume variance for fixed overhead arises becauseof the conflict between accounting for control (flexible budgets) of the conflict between accounting for control (flexible budgets)
and accounting for product costing (applied rates).and accounting for product costing (applied rates).
A flexible budget for fixed overhead is a lump-sum A flexible budget for fixed overhead is a lump-sum budgeted amount; volume does not affect it. However, budgeted amount; volume does not affect it. However,
applied fixed cost depends on actual volume.applied fixed cost depends on actual volume.
Variable Costing and Absorption CostingVariable Costing and Absorption Costing
The difference between income reportedThe difference between income reportedunder these two methods is entirely due tounder these two methods is entirely due tothe treatment of fixed manufacturing costs.the treatment of fixed manufacturing costs.
Variable Costing and Absorption CostingVariable Costing and Absorption Costing
On a variable-costing income statement, costs are On a variable-costing income statement, costs are separated into the major categories of fixed and variable.separated into the major categories of fixed and variable.
Revenue less all variable costs (both manufacturing Revenue less all variable costs (both manufacturing and non-manufacturing) is the contribution margin.and non-manufacturing) is the contribution margin.
On an absorption-costing income statement, costsOn an absorption-costing income statement, costsare separated into the major categories of are separated into the major categories of
manufacturing and non-manufacturing. Revenue manufacturing and non-manufacturing. Revenue less manufacturing costs (both fixed and variable)less manufacturing costs (both fixed and variable)
is gross profit or gross margin.is gross profit or gross margin.
Flexible budgets are Flexible budgets are primarily designed to primarily designed to assist planning and assist planning and
control rather control rather than product costing.than product costing.
Flexible-budget variances measure components of Flexible-budget variances measure components of the differences between actual amounts and thethe differences between actual amounts and theflexible-budget amounts for the output achieved.flexible-budget amounts for the output achieved.