McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Departmentalizing Overhead Costs

7-2 Introduction While the cost of direct material and labor are charged to specific job, all other costs are charged to manufacturing overhead.

7-3 Types of Manufacturing Overhead costs Some of the common overhead costs in a factory operation include: –Indirect material Example: shop supplies, cleaning supplies –Indirect labor Example: factory line supervisors, janitors –Other manufacturing overhead Example: employee fringe benefits, payroll taxes, depreciation, insurance

7-4 Control of Manufacturing Overhead Costs The method used to record manufacturing overhead cost depends on: –Size of the company –How it is organized –Types of products manufactured Account in use: Manufacturing Overhead Control account in the general ledger

7-5 Departmentalization of Overhead Separate control accounts –Maintain a control account for each different manufacturing overhead cost Single control accounts –Subsidiary ledger by type of cost –Subsidiary ledger by department

7-6 Recording Overhead Costs Voucher register entries –Invoice comparison with purchase order –Preparation of voucher including a notation of department to be charged Distribution memorandum indicates how the cost is to be distributed –Enter into voucher register upon approval –Charge the cost to the appropriate departmental overhead analysis sheet

7-7 Recording Overhead Costs (cont’d) General journal vouchers –Most manufacturing overhead costs include fixed costs –Involves the preparation of a schedule of monthly fixed overhead costs The schedule is attached to the journal voucher and posted to departmental overhead analysis sheet.

7-8 Summary Schedule of Departmental Costs Schedule shows the total amount of each type of cost incurred in each department –Prepared at the end of each month –Subsidiary ledger should agree with its related control account

7-9 Allocating Overhead to Jobs Overhead cost must be associated with products or jobs –This ensures that the transfer will parallel the work flow –First step – distributing overhead costs to departments

7-10 Distributing Service Department Costs Service department costs must be redistributed to where goods are produced Costs should be distributed in proportion to services provided

7-11 Distributing Service Department Costs (cont’d) –Order of Allocation Distribute first the costs of the service department that serves the greatest number of other departments, then distribute for the second highest and so on If there is no single department performing this task, apportion cost based on the largest expenditure first Once costs for a department have been apportioned, no further costs are prorated to it Another method is to apportion costs only to producing departments

7-12 Distributing Service Department Costs (cont’d) –Basis for allocation - Costs are redistributed by ratios that relate the service provided and some functional basis Allocating building service department costs based on floor space occupied by each department Allocating general factory department costs based on the total direct labor cost in the producing department

7-13 Recording Overhead Distribution in the General Ledger At the end of the month the distribution of overhead costs is entered in the general ledger –Manufacturing overhead control is closed into separate departmental overhead accounts –Distribution of service department costs are journalized in the order of allocation

7-14 Flow of Entries to Record Distribution of Overhead Costs