© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen

Job-Order Costing

Chapter 8

© 2015 McGraw-Hill Education

 Learning Objective 1

Distinguish between
process costing and job-
order costing, and identify
companies that would use
each costing method.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 3

 Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable fromfrom
other
other units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product
enables
enables assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 4

 Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
Example companies:
product.

 1. Asia
OnePulp
One unit & product
unit of
of Paper
product (paper
is manufacturing)from
is indistinguishable
indistinguishable from
other units
units of
of product.
2. Kang-shi-fu
other (Instant Noodle Producer)
product.

 3. Coca-Cola
The
The identical(mixing
identical nature
natureand
of bottling
of each
each unitbeverages)
unit of
of product
product
enables
enables assigning
assigning thethe same
same average
average cost
cost per
per unit.
unit.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 5

 Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.

 Products
Products areare manufactured
manufactured to to order.
order.

 The
The unique
unique nature
nature ofof each
each order
order requires
requires tracing
tracing
or
or allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 6

 Types of Product Costing Systems

Process Job-order
Costing Costing

 Example
 Many
Manycompanies:
different
different products
products are
are produced
produced each
each period.
period.
 1. Commercial
 Products
Products are
Aircraft Corporation
are manufactured
manufactured to
of China
to order.
order.
 (aircraft manufacturer)
 The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing
2. Tata
or
or Consultancy
allocating
allocating costsServices
costs to
to each (Information
each job,
job, and Technology)
and maintaining
maintaining cost
cost
3. Hongfor
records
records Kong
for each
each Aircraft
job. Engineering (aircraft maintenance)
job.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 7

 Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product

Cost accumulated by Individual Department or

Job Process
Average cost computed by Job Department or
Process

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 8

 Quick Check 

Which
Which of
of the
the following
following companies
companies
would
would be
be likely
likely to
to use
use job-order
job-order
costing
costing rather
rather than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 9

 Quick Check 

Which
Which of
of the
the following
following companies
companies
would
would be
be likely
likely to
to use
use job-order
job-order
costing
costing rather
rather than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 10

 Learning Objective 2

Identify the documents

used in a job-order costing
system.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 11

 Job-Order Costing – An Overview

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Manufacturing Job No. 3 each job as
Overhead work is
performed.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 12

 Indirect Manufacturing Costs

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 13
 The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 14

 Measuring Direct Materials Cost
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-09

Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized
Signature Will E. Delite

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 15

 Measuring Direct Materials Cost
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 16

 Measuring Direct Labor Costs

PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/2009

Employee I. M. Skilled Station 42

Starting Ending Hours Hourly

Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143

Totals 8.00 $ 11.00 $ 88.00 A-143

Supervisor C. M. Workman

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 17

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 18

 Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 19

 Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine hours,
is used to assign manufacturing overhead to
individual jobs.
We use an allocation base because:
1.It is impossible or difficult to trace overhead costs to particular jobs.
2.Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s salary.
3.Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 20

 Manufacturing Overhead Application
The predetermined overhead rate
(POHR) used to apply overhead to jobs is
determined before the period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 21

 The Need for a POHR

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.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 22
 Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.

  
Estimate the level of Estimate total amount Estimate total
production for the of the allocation base manufacturing
period. for the period. overhead costs.

POHR =  ÷ 
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 23
 Application of Manufacturing Overhead

Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.

Overhead applied = POHR × Actual activity

Actual
Actual amount
amount of
of allocation
allocation is
is
based
based upon
upon the
the actual
actual level
level of
of
activity
activity (normal
(normal costing
costing system).
system).

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 24

 Overhead Application Rate
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For each direct labor hour worked on a particular job,
$4.00 of factory overhead will be applied to that job.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 25

 Learning Objective 4

Compute the total cost and

average cost per unit of a
job.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 26

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed 3-5-09
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost
Unit Product Cost

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 27

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
Date Completed 3-5-09
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 28

 Interpreting the Average Unit Cost

The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit was produced.

Fixed overhead would not change if another unit

was produced, so the incremental cost of
another unit is something less than $118.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 29

 Quick Check 

Job WR53 at NW Fab, Inc. required $200 of

direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labor hours were 20,000. What would be
recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 30

 Quick Check 

Job WR53 at NW Fab, Inc. required $200 of

direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labor hours were 20,000. What would be
recorded as the cost of job WR53?
POHR = $760,000/20,000 hours $38
a. $200.
Direct materials $200
b. $350. Direct labor $15 x 10 hours $150
c. $380. Manufacturing overhead
Total cost
$38 x 10 hours $380
$730
d. $730.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 31

 Learning Objective 5

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record
costs.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 32

 Job-Order Costing
Document Flow Summary

A
A sales
sales order
order isis the
the AA production
production
basis
basis of
of issuing
issuing aa order
order initiates
initiates
production
production order.
order. work
work on
on aa job.
job.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 33

 Job-Order Costing
Document Flow Summary

Materials
used may be Direct Job Cost
either direct or materials Sheets
indirect.
Materials
Requisition

Manufacturing
Indirect Overhead
materials Account

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 34

 Job-Order Costing
Document Flow Summary
An
employee’s
time may be either Direct Job Cost
Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 35

 Job-Order Costing
Document Flow Summary

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing
overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 36

 Job-Order Costing: The Flow of Costs

The transactions (in T-

account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 37

 The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material
  Direct (Job Cost Sheet)
Purchases  Direct
Material
Indirect


s Material
Material s
s
Mfg. Overhead
Actual Applied
 Indirect

Material
s
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 38
 Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 39

 Cost Flows – Material Usage
Direct materials issued to a job increase
Work in Process and decrease Raw
Materials. Indirect materials used are
charged to Manufacturing Overhead and
also decrease
GENERAL Raw Materials.
JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 40

 The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)

Direct 
Direct
Labor

Indirect Material
Direct
Labor s
Labor

Mfg. Overhead
Actual Applied

Indirect

 Material
Indirect
s
Labor
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 41
 The Recording of Labor Costs
The cost of direct labor incurred
increases Work in Process and the cost
of indirect labor increases Manufacturing
Overhead.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Salaries and Wages Payable XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 42

 Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)

Direct 
Direct
Labor

Indirect Material
Direct
Labor s
Labor
Mfg. Overhead
Actual Applied

Indirect


Indirect
Material
Labor s

Other
Overhea
© 2015 McGraw-Hill Education d Garrison, Noreen, Brewer, Cheng & Yuen 43
 Recording Actual Manufacturing Overhead
In addition to indirect materials and
indirect labor, other manufacturing
overhead costs are charged to the
Manufacturing Overhead account as they
are incurred.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX
Accounts Payable XXXXX
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 44

 Learning Objective 6

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 45

 Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)

Direct 
Direct
Labor

Indirect Material
Direct


Labor s
Labor
Mfg. Overhead

Overhead
Actual Applied Applied

Indirect
If actual and applied

Overhead manufacturing overhead

Indirect
Material Applied are not equal, a year-end
Labor s to Work adjustment is required.

Other in
Overhea Process
© 2015 McGraw-Hill Education d Garrison, Noreen, Brewer, Cheng & Yuen 46
 Applying Manufacturing Overhead
Work in Process is increased when
Manufacturing Overhead is applied to jobs.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 47

 Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

individual jobs; rather, they are expensed in the
period incurred.

Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 48

 Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses)
are charged to expense as they are incurred.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Salaries Expense XXXXX
Salaries Payable XXXXX

Advertising Expense XXXXX

Accounts Payable XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 49

 Learning Objective 7

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 50

 Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet )
 Direct  Cost
Cost of
Material of Goods
Direct


s Goods Mfd.
Labor
 Overhead Mfd.
Applied

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 51

 Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods
from Work in Process.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 52

 Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
 Direct  Cost Cost
Cost of of
Material of Goods Goods
Direct


s Goods Mfd. Sold

Labor
 Overhead Mfd.
Applied Cost of Goods Sold
 Cost
of
Goods
Sold
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 53
 Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to
record the Cost of Goods Sold.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX

Cost of Goods Sold XXXXX

Finished Goods XXXXX

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 54

 Learning Objective 9
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 55

 Problems of Overhead Application
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.

Underapplied overhead Overapplied overhead

exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 56
 Overhead Application Example

PearCo’s actual overhead for the year was

$650,000 with a total of 170,000 direct labor
hours worked on jobs.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per
direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 57

 Overhead Application Example

PearCo’s actual overhead for the year was

$650,000 with a total of 170,000 direct labor
hours worked on jobs.
How muchhas
PearCo total overhead was applied to PearCo’s
overapplied
jobs during
overhead the year? Use PearCo’s
for the year
predetermined overhead
by $30,000. What will rate of $4.00 per direct
PearCo do? labor hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 58

 Disposition of Under- or Overapplied
Overhead
PearCo’s Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 59

 Disposition of
Under- or Overapplied Overhead

PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 60

 Allocating Under- or Overapplied
Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 61

 Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

10% × $30,000

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 62

 Allocating Under- or Overapplied
Overhead Between Accounts
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead 30,000
Work in Process Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 63

 Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCo’s
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 64

 End of Chapter 8

© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 65