University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

107

Pages:

2
Author:

stud_ice13

Flow of Overhead Costs 1. Four-Step Overhead Process: o The overhead process involves four key steps: 1. Estimate Total Overhead Costs for the period. 2. Select an Activity Base that reflects the use of overhead resources, such as direct labor hours, direct labor cost, or machine hours. 3. Calculate the Predetermined Overhead Rate by dividing the estimated total overhead by the estimated activity base. 4. Apply Overhead to Jobs using this predetermined rate. 2. Setting the Predetermined Overhead Rate: o The predetermined overhead rate is calculated at the start of the period: Predetermined Overhead Rate=Estimated Total OverheadEstimated A ctivity Base o Example: For Road Warriors, with estimated overhead costs of $200,000 and estimated direct labor costs (activity base) of $125,000, the predetermined overhead rate is: o This rate allows the company to apply estimated overhead throughout the period, enabling managers to monitor job costs and set prices without waiting for actual overhead totals. 3. Applying Overhead to Jobs: o Overhead is applied to each job based on its actual use of the activity base. For Road Warriors, the activity base is direct labor cost. o Example Entry: In March, Road Warriors applied $6,720 in estimated overhead to jobs based on their direct labor costs, posting this entry: Work in Process Inventory Factory Overhead 6,720 6,720 This entry credits Factory Overhead (a clearing account) and debits Work in Process Inventory, transferring the overhead to the WIP account for each job in progress. 4. Recording Applied Overhead: o The applied overhead for each job is added to its job cost sheet alongside direct materials and direct labor. This provides a complete view of total production costs for the job. o At the end of the period, the Factory Overhead account is closed to ensure no balance carries forward. Any discrepancy between actual and applied overhead is adjusted, typically through Cost of Goods Sold. o Example Problem Solution Given Data: • • • Estimated overhead: $240,000 Activity base: machine hours (1,600 estimated for the year) Predetermined Overhead Rate: 240,0001,600=150 per machine hour Overhead Applied to Jobs in June: • • Job 1: 80 machine hours × $150 = $12,000 Job 2: 70 machine hours × $150 = $10,500 Journal Entry for Overhead Applied in June: Work in Process Inventory Factory Overhead 22,500 22,500 This entry records the applied overhead cost, ensuring each job in Work in Process Inventory includes an allocated portion of the estimated overhead. In summary, overhead costs in job order costing are estimated, allocated to jobs based on a predetermined rate, and recorded in the Work in Process account. This approach ensures timely and consistent overhead application for cost control and pricing purposes.