The cost of Job can be found in the beginning inventory for finished goods inventory.

Actual Overhead

The company applied overhead to the jobs in entry d based on a predetermined overhead rate. Many of the actual overhead costs are not known until the end of the month or later.

For example, the company would not receive its utility bill for July until sometime in August. In addition to the indirect materials and indirect labor recorded in entries b and c , Creative Printers incurred these other overhead costs for July:. To prepare the journal entry, we debit the Overhead account for the actual costs. Then we credit Accounts Payable for the machinery repairs and maintenance, utilities, and other overhead. We assume an outside contractor does the maintenance and repairs.

Here is the journal entry to record the actual overhead:. If we posted each of these journal entries, you will find the ending balances of the inventory accounts to be:.

Overhead application is recorded with a A credit to Work in Process Inventory B

Notice, Job has been moved from Finished Goods Inventory since it was sold and is now reported as an expense called Cost of Goods Sold. Whenever we use an estimate instead of actual numbers, it should be expected that an adjustment is needed. We will discuss the difference between actual and applied overhead and how we handle the differences in the next sections. Managers would use the preceding cost information for several purposes: First, they would compare the actual costs of the job with expected costs, both as the work is being done and after the job has been completed.

Later chapters discuss the role of managerial accounting in performance evaluation. Second, managers would assess the profitability of jobs. Third, managers would compare actual overhead on the left side of the Overhead account, with the overhead applied to jobs on the right side. If the actual overhead exceeds the applied overhead, they may wish to learn why the actual overhead is so high. Also, they may ask the accountants to increase the overhead applied to jobs to give them a better idea of the cost of jobs.

The following information was extracted from the job-order cost sheet for Job The total cost of Job was a. Use the following information to answer question At the end of the year three jobs remained in process.

They were as follows: Hamilton's ending work in process balance is a. Cannot be computed with the information available. Part II: Problem 1 Brentwood Associates uses a job-order costing system and applies overhead on the basis of direct labor hours. During the year, the company actually worked 24, direct labor hours and incurred the following manufacturing costs: Calculate the predetermined overhead application rate for the year.

Applied Overhead

Determine the amount of manufacturing overhead applied to work in process during the year. Determine the amount of underapplied or overapplied overhead for the year. Problem 2 The Mahoney Company has two producing departments: Under these frameworks, applied overhead is included in the financial statements of a business.

• Measuring and recording manufacturing overhead cost.
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Applied overhead is not considered appropriate in many decision-making situations. For example, the amount of corporate overhead applied to a subsidiary reduces its profits, even though the activities of the corporate headquarters staff do not assist the subsidiary in earning a higher profit. Similarly, the application of factory overhead to a product may obscure its actual cost for the purposes of establishing a short-term price for a specific customer order.

Consequently, applied overhead may be stripped away from a cost object for the purposes of some types of decision making. Articles Topics Index Site Archive.

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