Cost Accounting 1-4 - Accounting for Manufacturing Overhead

How Costs Get Assigned to Products Under Actual and Normal Costing

Direct materials and direct labor are traced to a product or service provided because it is easy to determine which product/service to which the cost belongs. Manufacturing overhead (indirect costs) are allocated to products and services because it is difficult to identify the specific product or service to which the cost belongs.

Approaches to Allocating Overhead

In Normal Costing overhead rates are determined at the beginning of the period. (Budgeted MOH cost / Budgeted production). Overhead is applied during production. (Budgeted rate x Actual production). In Actual Costing overhead rates are determined at end of period. (Actual MOH cost / Actual production). Overhead is applied at end of period. (Actual rate x Actual production).

WatCo allocates overhead based on DL hours. For 2008: Estimated MOH costs = $210,000 Actual MOH costs = $210,600 Estimated DL hours = 5,000 Actual DL hours = 5,200

In Normal Costing: $210,000 / 5,000 = $42/hour x 5,200 = $218,400 In Actual Costing: $210,600 / 5200 = $40.50/hour x 5,200 = $210,600 Never have over or underapplied overhead with actual costing.

McAlister Company provided the following amounts: Estimated MOH Costs = $50,000 Actual MOH Costs = $49,500 Estimated direct labor hours = 12,500 Actual direct labor hours = 12,400 The company allocates overhead based on DL hours.

Normal Costing = 50,000 / 12,500 = $4/hour x 12,400 = $49,600. MOH T-account D | C 49,500 | 49,600 | 100 Overapplied

McAlister Company provided the following amounts: Estimated MOH Costs = $50,000 Actual MOH Costs = $49,500 Estimated direct labor cost = $156,250 Actual direct labor cost = $153,600 The company allocates overhead based on DL cost.

Normal Costing = 50,000 / 156,250 = $0.32/dollar x 153,600 = $49,152. MOH T-account D | C 49,500 | 49,152 348 | Underapplied

McAlister Company provided the following amounts: Estimated MOH Costs = $50,000 Actual MOH Costs = $49,500 Estimated units to be produced = 4,000 Actual units produced = 4,100 The company allocates overhead based on units produced.

Normal Costing = 50,000 / 4,000 = $12.50/unit x 4,100 = $51,250. MOH T-account D | C 49,500 | 51,250 | 1,750 Overapplied

Normal Costing is Better than Actual Costing because...

Normal Costing is applied during production which enables managers to know product and job costs as production occurs (on a timely basis). Waiting until the end of the period when actual costs are known make information untimely. Managers need the information to make decisions on pricing changes, production changes, etc.

Over and Underapplied Overhead

Occurs due to estimates used in determining the manufacturing overhead rate that is used to apply MOH. Identified by looking at the balance in the MOH account. Debit balance - Underapplied, not enough overhead was applied. Credit balance - Overapplied, too much overhead was applied.

Selecting an Activity

The denominator of the overhead rate is an activity. An activity is what causes the cost to be incurred. When a single or plant-wide cost pool for MOH is used, common activities include: Number of unites to be produced Number of direct labor hours to be used Number of direct labor dollars to be incurred Number of machine hours to be used Based on management's best guess of what causes costs to increase based on cause-and-effect relationship.

Assigning Costs to Cost Objects

Three methods: Actual costing, Normal costing, Standard costing. Differs in how the 3 product costs are assigned to products or services Actual Normal Standard Direct Materials Actual Actual Budgeted Direct Labor Actual Actual Budgeted MFG Overhead Actual Budgeted Budgeted

Accounting for Manufacturing Overhead

When actual overhead costs are incurred: Debit Manufacturing Overhead Expense Credit Payables/Cash/Acc. Depreciation/Prepaids Apply overhead to products: Debit Work in Process Credit Manufacturing Overhead Expense Assume a single rate though many companies use multiple cost pools with multiple rates (separate rates for variable and fixed MOH costs, "plant wide" rates for individual factory areas).