1. Chapter 3 - Overhead You will get this Never give up Never surrender!

2. Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Sequence of Events in a Job- Order Costing System Direct Materials Direct Labor

3. Calculating and Applying Overhead 1.Calculate a Predetermined Overhead Rate based on Budget Data 2.Charge Actual Overhead to the Overhead account 3.Calculate the applied amount of Overhead $$$$, charge to WIP 4.Post applied Overhead to the Manufacturing Overhead account (above) and WIP 5.Balance in Overhead account is equal to Over/Under Applied overhead 6.Transfer ending balance in Manufacturing Overhead out, leaving a ZERO balance in Manufacturing Overhead

4. Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing Overhead Examples: Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.) Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

5. Tiger Co. List of costs: Budgeted Costs Direct mtls $ 1,500,000 Direct labor $ 380,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,500 Advertising expense $ 75,000 Training for production employees on new system $ 62,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 510,000 Utilities $ 100,000

6. Tiger Co. List of costs: Budgeted Costs Direct mtls $ 1,500,000 Direct labor $ 380,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,500 Advertising expense $ 75,000 Training for production employees on new system $ 62,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 382,500 Utilities $ 75,000

7. Budgeted Cost Driver For this problem, assume a cost driver of Direct Machine Hours: Budgeted Machine Hours = 305,000 hours What is your Predetermined Overhead Rate?

8. Predetermined Overhead rate $1,220,000/305,000 hours = $4/per what? _________________

9. Do we use ACTUAL costs to apply Overhead to WIP? NO NO NO NO NO NO NO NO NO NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Charge to Manufacturing Overhead instead – debit How much and which accounts?

10. How do you apply overhead?

11. Apply overhead to each job using a predeter- mined rate. Sequence of Events in a Job- Order Costing System Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

12. Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period. Based on estimates, and determined before the period begins. Application of Manufacturing Overhead Overhead applied = POHR × Actual activity

13. Tiger Co. List of costs: ACTUAL Costs Direct mtls $ 1,490,000 Direct labor $ 364,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,000 Advertising expense $ 75,000 Training for production employees on new system $ 60,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 500,000 Utilities $ 104,000

14. Tiger Co. List of costs: ACTUAL Costs Direct mtls $ 1,490,000 Direct labor $ 364,000 Sales commissions $ 650,000 Salary of production supervisors $ 350,000 Salary of purchasing dept. $ 300,000 Indirect materials $ 50,000 Advertising expense $ 75,000 Training for production employees on new system $ 60,000 Training for accounting employees on new system $ 20,000 Rent (factory uses 75% of floorspace) $ 375,000 Utilities $ 78,000

15. Mfg. Overhead Work in Process (Job Cost Sheet) Direct Materials Overhead Applied Overhead Applied to Work in Process Direct Labor Indirect Labor Indirect Materials ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Job-Order System Cost Flows Other Indirect Costs

17. How much to Apply? Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 hours during the period but actually worked 290,000 machine hours during the period. How much should Tiger apply?

18. How much to Apply? Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 hours during the period but actually worked 290,000 machine hours during the period. How much should Tiger apply? 290,000 x $4 = $1,160,000

19. MOH – Cost flows Mfg. Overhead ActualApplied $ 350,000 $ 300,000 $ 50,000 $ 60,000 $ 375,000 $ 78,000 $ 53,000 $ 1,160,000

20. Is it Over or Under Applied? Tiger, Inc. had actual manufacturing overhead costs of: $1,213,000 Tiger, Inc. expected to work: 305,000 machine hours but actually worked: 290,000 machine hours

21. MOH – Cost flows Mfg. Overhead ActualApplied $ 350,000 $ 300,000 $ 50,000 $ 60,000 $ 375,000 $ 78,000 $ 1,213,000 $ 1,160,000

22. Mfg. Overhead Work in Process (Job Cost Sheet) 1,190,000 ActualApplied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. Job-Order System Cost Flows 1,190,000 $1,213,000

23. MOH – Cost flows Mfg. Overhead ActualApplied $ 350,000 $ 300,000 $ 50,000 $ 60,000 $ 375,000 $ 78,000 $ 1,213,000 $ 53,000 $ 1,160,000 Actual costs are Greater than Applied Rate: Is this Over or Under Applied????

24. MOH – Cost flows Mfg. Overhead ActualApplied $ 350,000 $ 300,000 $ 50,000 $ 60,000 $ 375,000 $ 78,000 $ 53,000 $ 1,160,000 Overhead is UNDER applied

25. Overapplied and Underapplied Manufacturing Overhead Tiger Co’s Mfg. Overhead Actual overhead costs $1,213,000 $53,000 underapplied Tiger Co’s Cost of Goods Sold Unadjusted Balance $53,000 Adjusted Balance Overhead Applied to jobs $1,160,000

26. Over/Under Applied Actual $$$ > Applied $$$ = Under Applied or Debit Balance (unfavorable, increases COGS when you adjust) Actual $$$ < Applied $$$ = Over Applied or Credit Balance (favorable, decreases COGS when you adjust)

27. What affect does this adjusting entry have: On COGS (increase or decrease) On Net income (increase or decrease)