1. Management Accounting One
Flow of Costs II

2. Overhead Costs - A Closer Look
Costs that cannot be traced to products and services in a cost effective manner are called indirect costs and are part of manufacturing overhead.
Depreciation on Manufacturing Assets
Factory Utilities
Rent on Manufacturing Facilities
Indirect Labour
Supervisory Salaries
Indirect Materials
Manufacturing Overhead

3. Overhead Cost
Using a predetermined rate makes it possible to estimate total job costs sooner as ....
Actual overhead for the period is not known until the end of the period. $

4. Cost Driver Any factor that causes a change in the total
cost of an activity

5. Overhead Cost Overhead applied = POHR × Actual activity
The Predetermined Overhead Rate is
based on estimates, and is determined before the period begins.
Overhead applied = POHR × Actual activity
Actual Activity can be units produced,
direct labour hours, or machine hours.

6. Allocating Overhead Cost
A predetermined overhead rate (POHR) is used to apply overhead and is determined before the period begins.
Estimated total manufacturing overhead cost for the year
Estimated total labour hours for the year
POHR =
$40,320
12,000 hours
POHR = =
$3.36 per hour
Ex.

7. Over/Under Applied Overhead
At the end of the period the use of a
predetermined overhead rate requires
examination of the difference between
the actual overhead and the applied
overhead

8. Over/Under Applied Overhead Underapplied
Manufacturing Overhead
Actual Overhead
Applied Overhead
XXX XX
Debit Balance
Charge to

9. Over/Under Applied Overhead
Overapplied
Manufacturing Overhead
Actual Overhead
Applied Overhead XX
XXX
Credit Balance
Credit to

10. Disposition of Overhead Variances
If immaterial (not significant) allocate to
cost of goods sold
If material (significant) allocate amongst
work in process inventory, finished goods
inventory, and cost of goods sold

11. Inventory Control Systems
Periodic System -- uses purchases
account for increases
Perpetual System -- increases and
decreases inventory account for
purchases and distributions to
work-in-process

12. Job Cost System Used by companies that produce distinct
batches of identifiable products
Costs are accumulated by job
Unit cost computed by dividing total
costs by the number of units produced

13. Flow of Costs in A Job Cost System
Raw Materials
Work in Process
Finished Goods
Debited for
Credited for
Debit for cost
of purchases
Credit for amt
put into prod’n
Debited for
Credited
for cost of
cost of DM,
cost of each
cost of each
DL, and OH.
finished job
completed
goods at
time of
sale
Credited for
indirect materials
used
job
Factory Payroll
Debited for
wages paid
Cost of Goods Sold
Credited for direct
labour used in prod’n.
Debited for the
cost of goods
at the time of
sale
Credit for indirect
labour
Overhead Costs
Debited for
indirect costs,
and all other
overhead
Credited for overhead
costs charged to
production based on
predetermined rate
What inventory method is
In use here?

14. Product Cost Flow T-Accounts
Raw Materials
Finished Goods
7,890
324, ,125
5,640
5,500
53,500
49,000
1,000
Work In Process
Payroll
17,500
53,500
117,500
161, ,875
24,925
165,500
117,500
48,000
- 0 -
Overhead
117,300
Cost of Goods Sold
327,125
48,000
161,300
4,000
Explain the amounts
in each of the accounts.