Manufacturing overhead includes all manufacturing costs other than the costs of direct mate- rials and direct labor. Manufacturing Overhead is a control account; the details of the many different types of overhead costs are kept in a subsidiary ledger.
The Manufacturing Overhead account is debited for the actual amount of overhead costs incurred during the period. As shown in Exhibit 17–2a , actual overhead costs in January total
$93,000. These costs are posted to the overhead account from several sources. Indirect labor costs, for example, come from payroll records; purchases of indirect materials and payments of utility bills come from invoices and receipts; and depreciation of plant assets comes from end-of-period adjusting entries in the general journal.
Application of Overhead Costs to Jobs Overhead is an indirect cost and can- not be traced conveniently to specific jobs or units. As discussed previously, a predetermined overhead application rate is used to assign overhead costs to work in process. Oak & Glass uses an overhead application rate equal to 150 percent of direct labor cost. Therefore, each job cost sheet is charged with overhead costs equal to 150 percent of the direct labor cost relating to the job.
On the bottom of the page 766 is the summary entry made in the general ledger to record all overhead costs applied to jobs during the period.
1 To the extent that amounts are withheld from employees’ pay for such purposes as income taxes and Social Security taxes, the offsetting credits are to various current liability accounts. Accounting for payrolls was dis- cussed in Chapter 10.
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Over- or Underapplied Overhead In our example, actual overhead costs incurred during January amounted to $93,000, while the overhead applied to jobs using the over- head application rate totaled only $90,000. We should not expect that applied overhead will
Direct Labor
Manufacturing Overhead
Materials Inventory
Materials Subsidiary Ledger Woods
Glass Direct labor
payroll
Direct labor used (Bal., $8,000)
Indirect labor payroll
Applied (150% of direct labor)
Beg. balance Purchases (Bal., $17,000)
Materials used
Beg. balance Used: Job no. 830 8,000 Job no. 831 10,000 Job no. 832 12,000 Purchases
(Bal., $5,000)
Beg. balance Used: Job no. 831 15,000 Job no. 832 5,000 Purchases
(Bal., $12,000)
Postings to Job Cost Sheets Direct labor, per time tickets:
52,000
60,000
90,000 40,000
53,000 Other
(Bal., $3,000*)
*Underapplied overhead
(For detail, see subsidiary ledger below.)
50,000 13,000
54,000
Job no. 830 . . . $24,000 Job no. 831 . . . 20,000 Job no. 832 . . . 16,000 Total . . . $60,000
29,000 6,000
7,000 25,000
Direct materials, per requisitions:
Job no. 830 . . . $ 8,000 Job no. 831 . . . 25,000 Job no. 832 . . . 17,000 Total . . . $50,000 Overhead ($90,000) at predetermined rate of 150% of direct labor
Exhibit 17–2a FLOW OF COSTS FOR OAK & GLASS FURNITURE CO.
Work in Process Inventory . . . 90,000
Manufacturing Overhead . . . 90,000 To charge the Work in Process account with
overhead costs applied to jobs during the month (150% of direct labor costs for the month; $60,000 ⫻ 150% ⫽ $90,000).
Entry to apply overhead costs to production
Confirming Pages
Job Order Costing 767
exactly equal actual overhead because the predetermined overhead application rate is based on estimates .
A debit balance in the Manufacturing Overhead account at month-end indicates that overhead applied to jobs was less than the actual overhead costs incurred during the month. Therefore, a debit balance remains in the Manufacturing Overhead account and it is called underapplied overhead . A credit balance remaining in the account indicates that overhead applied to jobs exceeded actual overhead costs; thus a credit balance is termed overapplied overhead .
The month-end balances remaining in the Manufacturing Overhead account normally are allowed to accumulate throughout the year. These amounts tend to balance out from month to month, and the amount of overapplied or underapplied overhead at year-end usually
Exhibit 17–2b FLOW OF COSTS FOR OAK & GLASS FURNITURE CO. (CONTINUED) Work in Process Inventory
Job no. 831
Job no. 832 Beg. balance
Direct labor
Completed Beg. balance
Direct labor Manufacturing overhead Materials (Bal., $57,000)
Completed (Job no. 830 &
831)
Direct labor Completed
Manufacturing overhead Materials
Direct labor Manufacturing overhead Materials (Bal., $57,000)
90,000 22,000
24,000 Manufacturing overhead Materials
(For detail, see subsidiary ledger below.) 165,000
22,000 60,000
30,000 20,000
16,000 24,000
Cost of Goods Sold 200,000
French Court Dining Tables Completed
(Bal., $45,000)
Sold 75,000
French Court China Cabinets Beg. balance
(Bal., $10,000)
Sold 60,000
French Court Dining Chairs Beg. balance
Completed (Bal., $80,000)
110,000 Sold 90,000
Finished Goods Inventory Beg. balance
Completed (Bal., $135,000)
Sold 170,000 165,000
(For detail, see subsidiary ledger below.)
Work in Process Subsidiary Ledger (Job Cost Sheets)
Finished Goods Subsidiary Ledger 90,000
50,000
200,000
Job no. 830
36,000 8,000
120,000
25,000
30,000
17,000
50,000 75,000
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is not material in dollar amount. In this case, the year-end balance in the Manufacturing Overhead account may be closed directly to the Cost of Goods Sold, on the grounds that most of the remaining balance is applicable to goods sold during the year. If the year-end balance in the overhead account is material in dollar amount, it should be apportioned among the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts.