4-10 Computing Predetermined Overhead Rates The predetermined overhead rate is computed before the period begins using a four-step process.
1. Estimate the total amount of the allocation base (the denominator)
that will be required for next period’s estimated level of production.
2. Estimate the total fixed manufacturing overhead cost for the
coming period.
3. Use the following equation to estimate the total amount of
manufacturing overhead: Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base
4-18 5. Compute the Rate per Unit of each cost- allocate base used to allocate indirect costs to the job (normal costing so use budgeted values) Budgeted Manufacturing Budgeted Manufacturing Overhead Costs Overhead Rate = Budgeted Total Quantity of Cost-Allocation Base
6. Compute the indirect costs allocated to the
job: Budgeted Allocation Rate x Actual Base Activity For the Job
4-24 Allproduct costs are accumulated in the work-in-process control account. Direct materials used Direct labor incurred Factory overhead allocated or applied Actual indirect costs (overhead) are accumulated in the manufacturing overhead control account.
4-27 4. Other manufacturing overhead costs incurred during the period: Manufacturing Overhead Control XX Cash Control XX Accumulated Depreciation Control XX
4-28 5. Allocation (or application) of indirect costs (overhead) to the work-in-process account is based on a predetermined overhead rate. Work-in-Process Control XX Manufacturing Overhead Allocated XX
4-29 6. Products are completed and transferred out of production (Work-in-Process) to Finished Goods (in preparation for being sold). Finished Goods Control XX Work-in-Process Control XX
4-31 8. When marketing or customer-service costs are incurred, the appropriate expense account is increased and Cash Control is decreased (or Accounts payable Control would be increased, if the items/services are purchased on account) Marketing Expense XX Customer-Service Expense XX Cash Control XX
4-33 Recall that two different overhead accounts were used in the preceding journal entries: Manufacturing overhead control was debited for the actual overhead costs incurred. Manufacturing overhead allocated was credited for estimated (budgeted) overhead applied to production through the work-in-process account.
4-34 Actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts. If Overhead Control > Overhead Allocated, this is called Underallocated Overhead If Overhead Control < Overhead Allocated, this is called Overallocated Overhead
4-36 Adjusted allocation rate approach—all allocations are recalculated with the actual, exact allocation rate. Proration approach—the difference is allocated between cost of goods sold, work-in-process, and finished goods based on their relative sizes. Write-off approach—the difference is simply written off to cost of goods sold.