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
