Lecture 12. Lecture overview Application of Manufacturing Overhead The Need for a Predetermined Manufacturing Overhead Rate Over/underapplied FOH MCQs.

Lecture 12

Lecture overview

• Application of Manufacturing Overhead• The Need for a Predetermined Manufacturing

Overhead Rate• Over/underapplied FOH• MCQs Test with Example

The Following data pertain to the Hudebia Restaurant Supply company for the year just ended.Budgeted Sales Revenue Rs. 205000

Actual Manufacturing Overhead 340000

Budgeted Machine Hours 10000

Budgeted direct labor hours 20000

Budgeted Direct labor rate Rs. 14

Budgeted Manufacturing overhead Rs. 364000

Budgeted Machine hours 11000

Actual Direct Labor hours 18000

Actual Direct labor rate Rs. 15

1. Compute the firm’s predetermined overhead rate for the year using each of the following common cost drivers: a) machine hours, b) direct labor hours, c) direct labor dollars.

2. Calculate the over applied or under applied overhead for the year using each of the cost drivers listed above

Let’s summarize the document flow we have been discussing in

a job-order costing system.

Job-Order CostingDocument Flow Summary


Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account

Direct materials

Indirect materials

Materials usedmay be either

direct orindirect.


Job Cost Sheets

Employee Time


Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.



OtherActual OHCharges

Job Cost Sheets

AppliedOverhead

MaterialsRequisition

IndirectMaterial

EmployeeTime

IndirectLabor

Let’s examine the cost flows in a job-order costing system. We will

use T-accounts and start with materials.

Job-Order System Cost Flows

Raw Materials

MaterialPurchases

Mfg. Overhead

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Direct Materials

Direct Materials

Indirect Materials

Indirect Materials

Actual Applied

Next add labor costs and applied manufacturing

overhead to the job-order cost flows.



Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)

Direct

Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct Labor

Direct Labor

IndirectLabor

IndirectLabor

Indirect Materials

Actual AppliedIf actual and applied

manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Finished Goods

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Cost ofGoodsSold

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Direct

MaterialsDirect Labor

Overhead Applied

Overhead Application Example

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours.

How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead

rate of $4.00 per direct labor hour.


SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000



rate of $4.00 per direct labor hour.

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000



rate of $4.00 per direct labor hour,


Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

Overapplied and Underapplied Manufacturing Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

PearCo’s Method

OR

Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000

$30,000 overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

MCQs Test What effect will the overapplied overhead have on

PearCo’s cost of goods sold?a. Cost of goods sold will increase.b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.


PearCo’s cost of goods sold?a. Cost of goods sold will increase.b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.


PearCo’s net income?a. Net income will increase.b. Net income will be unaffected.c. Net income will decrease.


PearCo’s net income?a. Net income will increase.b. Net income will be unaffected.c. Net income will decrease.

Overapplied and Underapplied Manufacturing Overhead - Summary

If ManufacturingOverhead is . . .

UNDERAPPLIED INCREASECost of Goods Sold

(Applied OH is lessthan actual OH)

OVERAPPLIED DECREASECost of Goods Sold

(Applied OH is greaterthan actual OH)

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.






MCQs Test











MCQs Test

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Lecture overview

• Problem Question• Job-Order Costing Document Flow Summary• Job-Order System Cost Flows• Overhead Application Example• Overapplied and Underapplied Manufacturing

Overhead• MCQs Test Questions

End of Lecture 12

Lecture 12. Lecture overview Application of Manufacturing Overhead The Need for a Predetermined Manufacturing Overhead Rate Over/underapplied FOH MCQs.

Documents

applied manufacturing

total overhead

overhead salaries

direct labor hours20000

joborder cost flows

b direct labor hours

pohr actual direct labor

c direct labor dollars