Accounting Chapter 3

Computing POHR

1) Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2) Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3) Use the following equation to estimate the total amount of manufacturing overhead: y = a + bX Where: Y = Estimated total manufacturing overhead cost. a = Estimated total fixed manufacturing overhead cost. b = Estimated variable manufacturing overhead cost per unit of the allocation base. X = Estimated total amount of the allocation base. 4) Compute.

Predetermined overhead rates (POHR)

1) It is impossible or difficult to trace overhead costs to particular jobs. 2) Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. 3) Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. POHR = (Estimated total manufacturing overhead cost) / (Estimated total units in the allocation base)

Allocation base

An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. Usually a cost driver that causes overhead costs.

Raw materials

Any materials that go into the final product. When they're used in production, their costs are transferred to the Work in Process inventory account as direct materials.

Cost of goods sold schedule

Beginning finished goods inventory Add: Cost of goods manufactured = Cost of goods available for sale Less: Ending finished goods inventory = Unadjusted cost of goods sold Add: Under applied overhead (or deduct over applied) = Adjusted cost of goods sold

Finished goods

Consist of completed units of product that have not been sold to customers yet. Amount transferred from Work in Process to Finished Goods is referred to as the cost of goods manufactured.

Work in process

Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Direct labor costs are added directly to this inventory (and does not flow through Raw Materials). Manufacturing overhead costs are applied to Work in Process by multiplying the POHR by the quantity of the allocation base consumed by each job. When goods completed, costs are transferred from Work in Process to Finished Goods.

Cost of goods manufactured schedule

Direct materials: Beginning raw materials inventory Add: Purchases of raw materials = Total raw materials available Less: Ending raw materials inventory = Raw materials used in production Less: Indirect materials included in manufacturing overhead Direct labor Manufacturing overhead applied to WIP = Total manufacturing costs Add: Beginning WIP inventory = Less: Ending work in process inventory = Cost of goods manufactured

Cost of goods manufactured

Includes the costs associated with the goods that were finished during the period. As goods are sold, their costs are transferred from Finished Goods to COGS. Costs are now an expense after transfer to COGS. Before that, they are inventory on the balance sheet.

Applying manufacturing overhead

Overhead applied to job = POHR x Amount of allocation base incurred by the job Ex: 40,000 direct labor-hours, $220,000 total fixed manufacturing overhead costs, $2.50 variable manufacturing overhead cost per direct labor-hour. Y = 220,000 + (2.50 x 40,000) Y = $320,000 POHR = 320,000 / 40,000 = $8 per direct labor-hour Assume 27 hours were charged to job. Overhead applied to job = $8 x 27 = $216

The flow of costs

Raw materials purchases ---> Raw materials inventory ---> Work in process inventory Direct Labor Manufacturing overhead ---> Work in process inventory Work in process inventory ---> Finished goods inventory Finished goods inventory ---> COGS (income statement)

Underapplied / Overapplied overhead

Underapplied: occurs when applied costs are less than actual costs. Overapplied: occurs when actual costs are higher than applied costs. Actual overhead cost - applied overhead cost = underapplied / overapplied overhead Negative number means overapplied, positive means underapplied.

Computation of unit costs

Unit product cost = total product cost / # of units. Used for valuing unsold units in ending inventory and for determining COGS.

Job-order costing

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Charge direct material and direct labor costs to each job as work is performed. Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.