Chapter 20

1. Chapter 20 Part three

2. Assigning Manufacturing Costs to Work In Process Assigning Manufacturing Overhead • Relates to production operations as a whole • Cannot be assigned to specific jobs based on actual costs incurred • Must be assigned to work in process and to specific jobs on an estimated basis through the use of a Predetermined Overhead Rate LO 4 Indicate how the predetermined overhead rate is determined and used.

3. Assigning Manufacturing Costs to Work In Process Predetermined Overhead Rate • Based on the relationship between estimatedannual overhead costs and expected annual operating activity • Expressed in terms of an activity base such as • Direct labor costs • Direct labor hours • Machine hours • Any other activity that is an equitable base for applying overhead costs to jobs LO 4 Indicate how the predetermined overhead rate is determined and used.

4. Assigning Manufacturing Costs to Work In Process Predetermined Overhead Rate • Established at the beginning of the year • May use a single, company-wide predetermined rate • May use a different rate for each department and each department may have a different activity base • Formula for computing the predetermined rate overhead rate is LO 4 Indicate how the predetermined overhead rate is determined and used.

5. Assigning Manufacturing Costs to Work In Process Assigning Manufacturing Overhead • Assigned to Work in Process during the period to get timely information about the cost of a completed job • Current trend is to use machine hours as the activity base due to increased automation in manufacturing operations LO 4 Indicate how the predetermined overhead rate is determined and used.

6. Assigning Manufacturing Costs to Work In Process Example: At Wallace Manufacturing, direct labor cost is the activity base. Estimated annual costs: Overhead costs $280,000 Direct labor costs $350,000 The predetermined overhead rate is $280,000 ÷ $350,000 = 80%. Overhead applied is $22,400 ($28,000 January direct labor costs X 80%) and recorded as follows: LO 4 Indicate how the predetermined overhead rate is determined and used.

7. Assigning Manufacturing Costs to Work In Process Assigning Manufacturing Overhead The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory. LO 4 Indicate how the predetermined overhead rate is determined and used.

8. Assigning Manufacturing Costs to Work In Process At the End of Each Month: The balance in the Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs. LO 4 Indicate how the predetermined overhead rate is determined and used.

9. Assigning Manufacturing Overhead to Work in Process Review Question The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as: a. Direct labor cost. b. Direct labor hours. c. Machine hours. d. Any of the above. LO 4 Indicate how the predetermined overhead rate is determined and used.

10. Assigning Costs to Finished Goods When a job is completed, the costs are summarized and the job cost sheet is completed. LO 5 Prepare entries for jobs completed and sold.

11. Assigning Costs to Finished Goods The entry for Wallace Manufacturing to transfer its total cost to Finished Goods Inventory is Units remain in Finished Goods Inventory until sold LO 5 Prepare entries for jobs completed and sold.

12. Assigning Costs to Cost of Goods Sold Cost of goods sold is recognized when a sale occurs Example: On January 31 Wallace Manufacturing sells Job No. 101, costing $39,000, for $50,000. LO 5 Prepare entries for jobs completed and sold.

13. Summary of Job Order Cost Flows LO 5 Prepare entries for jobs completed and sold.

14. Summary of Job Order Cost Flows LO 5 Prepare entries for jobs completed and sold.

15. Reporting Job Cost Data The cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costs Applied overhead is added to direct materials and direct labor to determine total manufacturing costs LO 5 Prepare entries for jobs completed and sold.

16. Entries to Report Job Cost Data Review Question In M Company, Job No. 26 is completed at a cost of $4,500 and later sold for $7,000 cash. A correct entry is: a. Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000. b. Debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000. c. Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500. d. Debit Accounts Receivable $7,000 and credit Sales $7,000. LO 5 Prepare entries for jobs completed and sold.

17. Under- or Overapplied Manufacturing Overhead A debit balance in manufacturing overhead means that overhead is underapplied Overhead assigned to work in process is less than overhead incurred A credit balance in manufacturing overhead means that overhead is overapplied Overhead assigned to work in process is greater than overhead incurred LO 6 Distinguish between under- and overapplied manufacturing overhead.

18. Under- or Overapplied Manufacturing Overhead Any year end balance in manufacturing overhead is eliminated by adjusting cost of goods sold. • Underapplied overhead is debited to CGS • Overapplied overhead is credited to CGS Example: Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is: LO 6 Distinguish between under- and overapplied manufacturing overhead.

19. Under- or Overapplied Manufacturing Overhead Review Question Manufacturing overhead is underapplied if: a. Actual overhead is less than applied. b. Actual overhead is greater than applied. c. The predetermined rate equals the actual rate. d. Actual overhead equals applied overhead. LO 6 Distinguish between under- and overapplied manufacturing overhead .

20. Chapter Review – Brief Exercise 20-6 Marquis Company estimates that annual manufacturing overhead costs will be $600,000. Estimated annual operating activity bases are: direct labor cost $500,000; direct labor hours 50,000; and machine hours 100,000. Compute the predetermined overhead rate for each activity base. BaseCalculation DL Cost $600,000 ÷ $500,000 = 120% DL Hours $600,000 ÷ 50,000 = $12/DL hour Machine Hrs $600,000 ÷ 100,000 = $6/Mach hour LO 2 Identify the 3 broad functions of management.