1. Manufacturing Overhead Accounting
Actual and Applied

2. Objectives Discuss in detail
The procedures in applying manufacturing overhead using a single predetermined overhead rate
The procedures in recording manufacturing overhead
Departmentalization of manufacturing overhead
The calculation and use of separate departmental overhead rates

3. Manufacturing Overhead
Generally defined as those costs that are not conveniently identified with particular orders or units of products.
Includes all factory costs other than direct materials and direct labor
Also called as manufacturing expenses, factory burden, factory overhead, factory expenses, and indirect manufacturing costs

4. Types of Manufacturing Overhead costs
Indirect Materials
Indirect Labor
Other Manufacturing Overhead
Factory supplies
Lubricants
Cleaning supplies
Small tools
Packaging materials
Other items used in small amounts in manufacturing
Factory payroll clerks
Receiving clerks
Storeroom clerks
Storeroom supervisor
Purchasing clerks
Overtime premiums (unless the time is identified with a specific job)
Employee fringe benefits
Employee contributions
Worker’s compensation insurance
Factory utilities
Rent of factory building, warehouse, and equipment
Property taxes
Group health insurance for factory employees
Fire insurance
Repairs and maintenance
Inventory shortage
Spoiled goods

5. Control of Manufacturing Overhead costs
Factors to be considered:
Size of the company
Types of Products
A small company producing only one product, or a few products may keep a separate ledger account for each manufacturing overhead costs. If there are many products, manufacturing overhead analysis sheets should be maintained.

6. Charging Manufacturing Overhead to Production
Actual costing- costs is charged to production at an arbitrary manufacturing overhead costs using an arbitrary overhead application rate determined at the end of the period.
Normal Costing – uses a predetermined overhead rate to allocate manufacturing overhead costs to jobs

7. Purpose of Overhead rates
Used to estimate the manufacturing overhead costs as needed to assess efficiency, to change procedures if necessary and to aid in determining selling prices

8. Determining Overhead rates
Calculated at the beginning of a period, usually a year.
Rate is computed by the preparation of a manufacturing overhead budget based on a certain activity level.
The budgeted manufacturing overhead is then divided by the estimated amount or quantity
The ratio is called the OVERHEAD APPLICATION RATE
The overhead on each job is estimated by determining the actual base selected on the job and applying the rate

9. Types of Overhead Rate Bases
Direct Labor costs
Direct Labor hours
Direct Material costs
Machine hours
Units of production

10. Illustration The following data are based on the budget for 2023:
Manufacturing overhead costs P ,000
Number of units of production ,000 units
Direct material costs P 990,000
Machine hours ,000 hours
Direct labor hours ,000 hours
Direct labor costs P 300,000

11. DIRECT LABOR COSTS BASIS
Simple and easy to use
Data concerning direct labor costs of each job is available from the payroll records and time tickets
Percentage of Direct Labor costs= Estimated Manufacturing Overhead costs
Estimated Direct Labor costs
= P240,000 / 300,000
= .80 or 80%
If the actual direct labor costs incurred in a particular job totaled P10,000, the applied overhead would be P 8,000
THE DIRECT LABOR COSTS BASIS IS USUALLY USED IN CASES WHERE THE MANUFACTURING OVERHEAD COSTS VARY WITH DIRECT LABOR COSTS

12. DIRECT LABOR HOURS BASIS
This method assumes that overhead costs tend to vary with the number of direct labor hours used
Rate per direct labor hour= Estimated Manufacturing Overhead costs
Estimated direct labor hours
= P240,000 / 60,000 hrs
= P4.00 per direct labor hour
If a job required 3,200 direct hours to be completed , the overhead applied would be P12,800 (P4 x 3,200 hours)
THE DIRECT LABOR HOURS IS APPROPRIATE WHEN THERE IS A CORRELATION BETWEEN TOTAL MANUFACTURING OVERHEAD COSTS AND THE NUMBER OF DIRECT LABOR HOURS

13. MACHINE HOURS
Overhead may be applied as a rate for each machine hour when work is performed principally by machines
Rate per machine hour= Estimated Manufacturing Overhead costs
Estimate machine hour
= P240,000 / 18,000 hrs
= P13.33 per direct labor hour
If a job required 2,700 machine hours to be completed , the overhead applied would be P36,000 (P13.33 x 2,700 hours)
THE BASIS IS USUALLY USED IN AUTOMATED FACTORY WHERE MACHINES PERFORM MOST OF THE WORK AND EACH ITEM GOES THROUGH A SIMILAR SEQUENCE OF MACHINES. IT IS NOT HOWEVER APPROPRIATE IF DIFFERENT KIND OF MACHINES ARE USED FOR VARIOUS PRODUCTS

14. UNITS OF PRODUCTION BASIS
Based on the number of units manufactured during the period.
Overhead cost per unit of production= Estimated Manufacturing Overhead costs
Estimated units of production
= P240,000 / 20,000 units
= P12 per unit
If a job of 1,700 units were produced, the overhead applied would be P20,400 (P12 x 1,700unit)
This rate is used only if the manufacturing process is simple and only one type or a few similar types of products are produced.

15. Annualized Overhead Application Rate
To overcome fluctuations in the computed unit cost due to changes in the level of volume from month to month
To overcome fluctuations in the computed unit costs due to seasonal calendar, and other factors that may affect the total level of overhead costs incurred each month

16. Selecting the Overhead Basis
The overhead rate basis selected will depend on many factors (type of goods produced, amount of machinery employed, type of labor, wage rates paid, and cost and time involved in collecting the data)
The rate can be easily computed
The factor chosen as the basis must be the one that can easily be measured on each job
The amount of overhead costs incurred must have some direct relationship with the base selected

17. Recording Manufacturing Overhead
Actual overhead incurred (indirect materials, indirect labor, factory utilities, factory rent, factory insurance, factory depreciation)
Overhead applied to production
Actual costing – all actual OH
Normal costing – predetermined rates
Work in Process xxxx
Manufacturing overhead xxxx
All other cost or indirect costs to produce … examples.. Actual overhead..
all incurred to debit
Once applied to production… credit…
Actual costing… actual OH is applied to production
Normal costing use predetermined rate…practical purposes..hindi na mahihintay ang lahat for cost making, cost pricing…predetermined rates kahit hindi avail and actual, applied..

18. T-Account for overhead
With the use of actual costing:
ACTUAL OVERHEAD = APPLIED OVERHEAD
Since actual amount of overhead is being applied to production
With the use of normal costing:
ACTUAL OVERHEAD differs from APPLIED OVERHEAD
since the MOH account is debited for actual overhead
and the MOH account is credited for the amount of OH applied to production
Normal costing…with variance

19. Overhead variance ACTUAL OVERHEAD › APPLIED OVERHEAD
MOH T-account debit is greater than MOH T-account credit
Overhead at the end of the period (before adjustments) is UNDERAPPLIED
ACTUAL OVERHEAD ‹ APPLIED OVERHEAD
MOH T-account is lesser than T-account credit
Overhead at the end of the period (before adjustments) is OVERAPPLIED

20. Disposition of Overapplied or Underapplied Overhead
Assumption 1
If the amount is material, from the viewpoint of accounting theory, the overhead variance should be allocated proportionately to all goods that have been worked on during the year.
Work in Process
Finished Goods
Cost of Goods Sold
Direct Materials
10,000
40,000
100,000
Direct Labor
15,000
20,000
90,000
Applied Overhead
TOTAL
80,000
280,000
Assume a P100,000 underapplied overhead.

21. Allocation: Account balances Percentage to Total Allocated Amount
Work in process
40,000
10%
10,000
Finished goods
80,000
20%
20,000
Cost of goods sold
280,000
70%
70,000
TOTAL
400,000
P100,000
Work in process inventory ,000
Finished goods inventory ,000
Cost of goods sold ,000
Manufacturing overhead-underapplied ,000

22. Assumption 2
Cost of goods sold 100,000 Manufacturing overhead- underapplied 100,000

23. Financial Statement Presentation
Statement of Financial Position
Underapplied manufacturing overhead is treated as DEFERRED CHARGE shown under Prepaid Expenses in the Interim statement of FP
Overapplied manufacturing overhead is shown in the interim statement of FP as other liabilities

24. Financial Statement Presentation
Statement of Comprehensive Income
Included in the COST OF GOODS SOLD section as an adjustment to Cost of Goods Sold
If overhead is UNDERAPPLIED, less overhead was charged to production than was incurred resulting in the understatement of Cost of Goods Sold, therefore the variance is ADDED to Cost of Goods Sold.
If overhead is OVERAPPLIED, more overhead was charged to production than was incurred, resulting to overstatement of Cost of Goods Sold, therefore the variance is DEDUCTED from the Cost of Goods Sold.

25. Analysis of Overapplied or Underapplied Overhead

26. EXERCISES

27. EXERCISE 1
A Company assembles and sells electric mixers. All parts are purchased, and the cost of the parts per mixer totals P1,600. Labor is paid on the basis of P1,280 per mixer assembled. Budgeted manufacturing overhead for the next fiscal year on a production of P1,200,000 mixers, is as follows:
Indirect Materials P 8,800,000
Indirect Labor 9,600,000
Light and power 1,200,000
Depreciation ,000
Insurance ,000
Miscellaneous ,200,000
During the period, 1,160,000 mixers were assembled and actual manufacturing overhead incurred was P 22,834,000. These units were completed but not yet transferred to the finished goods storeroom.
Prepare the journal entries to record the above information.
Compute the amount of overapplied or underapplied overhead.

28. Work in process ,040,000
Factory overhead- applied ,040,000
To record applied factory overhead (P22,800,000 / 1,200,000 mixers) x 1,160,000
Factory overhead ,384,000
Various credits 22,384,000
To record actual factory overhead incurred.
(2) Actual factory overhead P22,384,000
Applied factory overhead 22,040,000
Underapplied factory overhead P ,000

29. EXERCISE 2
The following data are available for the B Company on December 31, 2021
Required: Prepare journal entry to close over or underapplied manufacturing overhead, assuming:
Underapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold.
Overapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold in proportion to the balances in those accounts.
Underapplied manufacturing overhead of P10,000 is allocated to cost of goods sold.
Underapplied overhead of P1,000 is to be allocated to inventories and cost of goods sold in proportion to amounts applied overhead contained in those accounts.
Work in Process
Finished Goods
Cost of Goods Sold
Direct Materials
4,000
12,000
24,000
Direct Labor
32,000
64,000
Applied Overhead
TOTAL
76,000
152,000

31. EXERCISE 2
The following data are available for the B Company on December 31, 2021
Required: Prepare journal entry to close over or underapplied manufacturing overhead, assuming:
Underapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold.
Overapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold in proportion to the balances in those accounts.
Underapplied manufacturing overhead of P10,000 is allocated to cost of goods sold.
Underapplied overhead of P1,000 is to be allocated to inventories and cost of goods sold in proportion to amounts applied overhead contained in those accounts.
Work in Process
Finished Goods
Cost of Goods Sold
Direct Materials
4,000
12,000
24,000
Direct Labor
32,000
64,000
Applied Overhead
TOTAL
76,000
152,000

33. EXERCISE 2
The following data are available for the B Company on December 31, 2021
Required: Prepare journal entry to close over or underapplied manufacturing overhead, assuming:
Underapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold.
Overapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold in proportion to the balances in those accounts.
Underapplied manufacturing overhead of P10,000 is allocated to cost of goods sold.
Underapplied overhead of P1,000 is to be allocated to inventories and cost of goods sold in proportion to amounts applied overhead contained in those accounts.
Work in Process
Finished Goods
Cost of Goods Sold
Direct Materials
4,000
12,000
24,000
Direct Labor
32,000
64,000
Applied Overhead
TOTAL
76,000
152,000

35. EXERCISE 2
The following data are available for the B Company on December 31, 2021
Required: Prepare journal entry to close over or underapplied manufacturing overhead, assuming:
Underapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold.
Overapplied overhead of P8,000 is to be allocated to inventories and cost of goods sold in proportion to the balances in those accounts.
Underapplied manufacturing overhead of P10,000 is allocated to cost of goods sold.
Underapplied overhead of P1,000 is to be allocated to inventories and cost of goods sold in proportion to amounts applied overhead contained in those accounts.
Work in Process
Finished Goods
Cost of Goods Sold
Direct Materials
4,000
12,000
24,000
Direct Labor
32,000
64,000
Applied Overhead
TOTAL
76,000
152,000

37. EXERCISE 3
R Corporation estimates that its production for the coming year will be 10,000 units, which is 80% of normal capacity, with the following unit costs:
Materials – P Direct Labor – P 60
Direct labor is paid at the rate of P24 per hour. The machine should be run for 20 minutes to produce one unit. Total estimated overhead is expected to consist of P400,000 for variable overhead and P400,000 for fixed overhead.
Required:
What is the predetermined overhead rate base on units of production using the expected actual capacity activity level
What is the predetermined overhead rate base on material cost?
What is the predetermined overhead rate base on direct labor cost?
What is the predetermined overhead rate base on direct labor hours
What is the predetermined overhead rate base on machine hours?
What is the overhead rate base on units of production using normal capacity activity level?
What is the overhead rate base on material cost using the normal capacity activity level?
What is the overhead rate base on machine hours using the normal capacity activity level?

38. P800,000 / 10,000 units = P80 per unit
P800,000 / P400,000 = 200% of material cost
P800,000 / P600,000 = 133% of direct labor cost
P800,000 / 25,000* = P32 per direct labor hour.
* P600,000 / P24 = 25,000 estimated direct labor hour.’

39. P800,000 / 3.333* = P2.40 per machine hour
• 20 minutes / 60 minutes = 1/3 machine hour per unit
1/3 hour per unit x 10,000 units = estimated machine hours
6. P800,000 / 12,500 units* = P64 overhead per unit.
*10,000 units / 80s% = 12,500 units
7. P800,000 / P500,000* = 160% of material cost.
* P40 x 12,500 units
8. P800,000 / (1/3 hour x 12,500 units) = P92 per machine hour.

40. EXERCISE 4
The P Company assembles and sells one product. The cost per unit are: materials P17; labor, P17. Production for year 2020 is estimated to be 20,000 units. Estimated manufacturing overhead are as follows:
Indirect labor P 22,000
Indirect materials ,000
Depreciation ,000
Light and power ,000
Others ,000
Completed production for year 2020 was 18,000 units and actual manufacturing overhead cost was P56,500. There are no beginning or ending work in process inventories.
Required:
The journal entries for materials, labor, and overhead (normal costing)
The entry to close the over or underapplied manufacturing overhead.

41. Work in process 630,000 Materials (18,000 x P15) 270,000 Factory payroll (18,000 x P17) 306,000 Factory overhead- applied (18,000 x P3*) 54,000 To record materials, labor and overhead charged Production. Factory overhead control may also be credited instead of Applied factory overhead. * (P22,000 + P16,000 + P7,000 + P5,000 + P10,000) / 20,000 = P3 Factory overhead 56,500 Various credits 56,500 To record actual factory overhead incurred. Cost of goods sold 2,500 Factory overhead 2,500 To close underapplied overhead to cost of goods sold.