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Overhead Application (or Absorption) the process of assigning manufacturing overhead costs to production jobs on some equitable basis RESULTS
cost of each product includes equitable share of total overheads
PROCESS
select absorbtion base calculate absorbtion rate per unit of base selected for each
Overhead Accounting
Beginning of Accounting period End of Accounting period
Time
Budgeted overhead (and calculation of predetermined overhead rate)
Applied overhead
Actual overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
This budgeted rate is used to apply overhead to all jobs completed during the year.
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period
POHR =
Both the numerator and denominator Ideally, the allocation base of the predetermined overhead rate are is primary cost driver that causes overhead. based on estimated amounts.
Predetermined
Why is the predetermined overhead rate calculated from estimated numbers at the beginning of the period?
It is a tradeoff between accuracy and timeliness. If a company waited until the end of an accounting period, when all overhead costs are known, the allocated factory overhead would be accurate but not timely.
Managers making decisions today cannot wait until the end of the year for product cost information.
To solve this problem accountants develop an estimated overhead allocation rate. Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.
Pear.Co applies overhead based on direct labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is Pear.Cos predetermined overhead rate per hour?
POHR =
II- CALCULATE ABSORBTION RATE PER UNIT OF BASE SELECTED FOR EACH PRODUCTION CENTRE which may be
as % of direct material cost
POHR =
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.
Overhead applied = POHR Actual activity : Overhead applied = $4 per DLH 8 DLH = $32
Step Two
Predetermined Actual activity Allocated manufacturing x = overhead rate level per job overhead assigned to job
POHR =
Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period
Work in Process
Job 1
Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. Incurred during the period.
Job 2
Job 3
Learning Objective
Understand
costs. Needed for accurate determination of income. Recorded as debit to Manufacturing Overhead.
Disadvantages Variation due to seasonal nature of some overhead costs e.g. change in volume of production, efficiency Overheads paid in advance Fire insurance premium It should be charges to all works manufactured during the year How should absorbtion be done?
Under applied Overhead the amount by which a periods actual manufacturing- overhead exceeds applied manufacturing- overhead Actual manufacturing-overhead $29,050 Applied manufacturing-overhead $28,800 Under applied overhead $ 250 Over applied Overhead the amount by which a periods applied manufacturing- overhead exceeds actual manufacturing- overhead
Manufacturing Overhead Actual 10 Applied 20 Manufacturing Overhead
Actual
Applied
PearCos actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to Pear Cos jobs during the year? Use Pear Cos predetermined overhead rate of $4.00 per direct labor hour.
PearCos actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
PearCos actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to PearCos jobs PearCo has overapplied during the year? Use PearCos predetermined overhead overheadrate of $4.00 per direct labor hour, for the year by $30,000. What will PearCo do?
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
OR
Work in Process Finished Goods Cost of Goods Sold
$650,000
$30,000
$680,000
$30,000 overapplied
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.