Accounting 311 Chapter 4 formulas

3 METHODS USED IN ALLOCATING INDIRECT COSTS

1 . ACTUAL COSTING 2. NORMAL COSTING 3. EXTENDED NORMAL COSTING

2 methods to proration approach

1) proration based on ending balances of WIP, FG, COGS 2) protation based on indirect costs (MOH)

GENERAL APPROACH TO JOB COSTING

1. what is the cost object? 2. what are the direct cost categories ? 3. what is allocation base ? 4. what are the indirect cost pools ? 5. CALCULATE THE ALLOCATION RATES 6. use the rates to allocate the indirect costs to the job 7. add 3 products together = total cost

PREFERRED METHOD 1 OR 2 ?

2. results in allocating manufacturing overhead based on actual manufactuirng overhead costs

POR = predetermined overhead rate

= total budgeted manufacturing overhead costs / total budget amount of allocation base

1 )PRORATION ADJUSTMENT (based off ending balances)

Account Balance / total balance of accounts (COGS + FINISHED GOODS + WIP ) = PROPORTION RATE proportion rate * MOH over - under allocated = Adjustment (=proration)

1 )Now calculate the account balances after the write off ( Account Balance after proration)

Account Balance before proration + adjustment ^ = Account balance after proration

2 ) Now calculate the account balances after the write off ( based off indirect/overhead allocated)

Account balance before proration + adjustment (2) = account balance after proration

Record the revenues (sales), 8000

Accounts Receivable (asset) 8000 Revenues 8000

Actual manufacturing overhead costs

Actual direct manufacturing labor costs * Actual manufacturing overhead rate

(DETERMINE THE MANUFATURING OVERHEAD UNDER NORMAL COSTING FOR THE ENTIRE YEAR) Overhead allocated using the normal costing method

Actual direct manufacturing labor costs * budget manufacturing overhead rate

Normal manufacturing overhead costs

Actual direct manufacturing labor costs * budget manufacturing overhead rate (BUDGETED RATE FOR NORMAL)

Actual manufacturing overhead rate

Actual manufacturing overhead costs/ actual manufacturing direct labor

Total manufacturing costs allocated to job

Add up the manufacturing overhead allocated to each specific department (machining and assembly)

2 )PRORATION ADJUSTMENT ( based on indirect/ overhead allocated )

Allocated over before proration^ / total overhead allocated = PROPORTION porportion * over - under allocated( ### we had before^) = Adjustment (proration)

Budgeted manufacturing overhead rate

Budgeted MOH / Budgeted machine hours

Budgeted direct-cost rate per hour

Budgeted compensation per professional/ budgeted direct labor hours per professional

Manufacturing overhead allocated (calculate the MOH costs to allocate to the jobs)

Budgeted indirect cost rate * Actual direct labor cots

Budgeted indirect -cost rate per hour

Budgeted indirect costs/ budgeted TOTAL direct labor hours

Budgeted manufacturing overhead rate

Budgeted manufacturing overhead costs/ budgeted manufacturing direct labor

Manufacturing overhead allocated to job

Budgeted overhead rate (POR) * actual cost allocation base

Overhead allocated

Budgeted overhead rate * actual machine hours

Cost of goods sold

Cost of goods sold Finished goods control

manufacturing cost per unit

Direct materials per unit + Direct labor per unit + Manufacturing overhead per unit

Cost of goods manufactured

Finished Goods Control Work-in-process control

Gross margin percentage

Gross margin / revenues (Revenues - COGS ENDING BAL) / Revenues ) Gross margin above 30% are good.

Why use normal costing?

It enables a company to use the budgeted manufacturing overhead rate determined at the begininning of the year to estimate the cost of a job as soon as the job is completed. 1. normal costing provides managers with information earlier while there is still time to take corrective actions, such as improving the company's labor efficiency or reducing the company's overhead costs 2. manufacturing costs of a job are available much earlier in a normal costing system (manufacturing and sales managers can evaluate the profitability of different jobs, the efficiency with which the jobs are done, and the pricing of different jobs as soon as they are completed, while the experience is still fresh in everyone mind)

ACTUALLY INCURRED BY THE COMPANY - AMOUNT OF OVERHEAD CALCULATED USING THE NORMAL COSTING METHOD =

MANUFACTURING OVERHEAD IS UNDERALLOCATED OR OVERALLOCATED (ask yourself...did the normal reach the amount of overhead actually incurred by the company?)

JOURNAL ENTRY (Proration)

Manufacturing Overhead Allocated 264,000 WIP ( overallocated amount= 10,000) * 10% (work in process / total )= 1000 FG ( 10,000 * 21% ( FG/ total) = 2100 COGS (10,000 * 69 % (COGS/TOTAL) = 6900 MANUFACTURING OVERHEAD CONTROL 254000

DEPRECIATION 400

Manufacturing overhead control Accumulated Depreciation

Record the miscellaneous MOH

Manufacturing overhead control (misc = indirect) Miscellaneous accounts

Record the indirect materials used, $100

Manufacturing overhead control 100 Materials control 100 ( we know indirect materials = MOH control)

Purchase materials for $800

Materials Control 800 Accounts Payable 800

allocated MOH > Actual MOH =

OVERALLOCATED = which goes to = COGS

allocated overhead cost

POR * Actual amount of allocation base used

Record the direct materials used, 710

Work in Process 710 Materials Control 710 ( when the materials are used they are going into the jobs that are in process ) ( direct materials used= debit work in process control)

Record the cost of the direct 1300 & indirect labor 900 used

Work in Process Control 1300 Manufacturing Overhead Control 900 Wages Payable 2200

manufacturing overhead allocated

Work-in-process control manufacturing overhead allocated

1. ACTUAL COSTING

actual direct costs actual indirect cost rates

2. NORMAL COSTING

actual direct costs budgeted indirect cost rates (this method is the most common)

3. EXTENDED NORMAL COSTING

budgeted direct costs budgeted indirect cost rates

allocated overhead

budgeted rate * acutal hours per account

overallocated =

decrease (credit to COGS)

direct labor per unit

direct manufacturing labor cost / units produced

direct cost per unit

direct materials cost / units produced

underallocated =

increase (debit to COGS)

Actual manufacturing overhead

indirect materials + indirect labor + depreciation + misc. manufacturing overhead

When manufacturing overhead costs are allocated=

they become part of W-I-P inventory