Chapter 15: Record Actual Overhead

Flow of Overhead Costs in Job Order Costing 1. Distinction Between Applied and Actual Overhead: o Applied Overhead: An estimated amount assigned to each job using a predetermined rate based on expected costs and activity levels (like labor or machine hours). Applied overhead is recorded on job cost sheets. o Actual Overhead: The actual, incurred overhead costs, which include indirect materials, indirect labor, depreciation, utilities, and other manufacturing-related expenses. These are recorded in the Factory Overhead account and are not posted to job cost sheets. 2. Recording Actual Overhead Costs: o Actual overhead costs are debited to Factory Overhead throughout the period, capturing the real costs incurred. Here’s how Road Warriors handles each type of actual overhead cost: a. Recording Indirect Materials: o Example: In March, Road Warriors incurs $550 in indirect materials costs (e.g., glue, cleaning supplies). Factory Overhead 550 Raw Materials Inventory 550 o This entry debits Factory Overhead and reduces Raw Materials Inventory for indirect materials used. These costs do not go into Work in Process or job cost sheets, as they apply to the factory overall. b. Recording Indirect Labor: o Example: Road Warriors incurs $1,100 in indirect labor costs (e.g., wages for maintenance workers and supervisors). Factory Overhead 1,100 Factory Wages Payable 1,100 o Indirect labor costs are also debited to Factory Overhead, reflecting factory-wide support costs without being linked to specific jobs. c. Recording Other Overhead Costs: o o Other overhead costs include factory-related expenses like utilities, insurance, rent, and depreciation. Example: Road Warriors incurs $5,270 in other overhead costs. Factory Overhead 5,270 Cash (or Payables, etc.) 5,270 Each overhead cost is recorded by debiting Factory Overhead and crediting accounts like Cash, Accounts Payable, or Accumulated Depreciation. These costs are likewise not included in Work in Process Inventory or on job cost sheets. 3. Adjusting for Overhead at Period-End: o At the end of the period, the Factory Overhead account is adjusted to zero. Any difference between the applied overhead (credited throughout the period) and actual overhead (debited throughout the period) creates either overapplied or underapplied overhead. o Overapplied Overhead (if applied exceeds actual) or Underapplied Overhead (if actual exceeds applied) is usually adjusted against Cost of Goods Sold. o Cost Flows to Financial Statements 1. Work in Process to Finished Goods: o Costs for direct materials, direct labor, and applied overhead accumulate in Work in Process Inventory until jobs are completed. o Upon completion, costs transfer from Work in Process to Finished Goods Inventory. o Example Entry (for completing Job B15): plaintext Копировать код Finished Goods Inventory 3,300 Work in Process Inventory 3,300 2. Finished Goods to Cost of Goods Sold: o When finished goods are sold, costs are transferred from Finished Goods Inventory to Cost of Goods Sold. o Example Entry (for selling Job B15): Cost of Goods Sold 3,300 Finished Goods Inventory 3,300 Sales revenue is recorded separately from the cost entry. 3. Schedule of Cost of Goods Manufactured: o This schedule summarizes total manufacturing costs, including direct materials, direct labor, and applied overhead (not actual overhead). o Example: Road Warriors’ cost of goods manufactured schedule would list total applied overhead instead of actual overhead costs. 4. Income Statement and Balance Sheet: o o o The income statement reports sales revenue, cost of goods sold (from the schedule of cost of goods manufactured), and period costs (like selling and administrative expenses). The balance sheet shows inventory accounts at period-end, including balances in Raw Materials, Work in Process, and Finished Goods inventories. Managerial Use of Job Cost Sheets Managers use job cost sheets for: 1. Controlling: Assessing profitability and efficiency; e.g., evaluating gross profit per job to identify cost-saving opportunities or areas where expenses may be too high. 2. Planning: Setting future pricing and production strategies, determining if prices need adjustment, and deciding which types of jobs are most profitable. 3. Bidding: Calculating costs for new jobs using past data, often through costplus pricing. For example, if a job’s estimated cost is $1,000, a company might add a 30% markup, setting a bid price of $1,300. In sum, actual overhead is recorded separately from applied overhead, with costs flowing through Factory Overhead and adjusted to balance at period-end. This structured flow allows for timely job costing and efficient managerial decisionmaking.