predetermined overhead Accounting Help

 application rate often is used to assign appropriate amounts of overhead costs to work in process. Oak & Glass uses an overhead application rate.equal to 150% of direct labor cost. Therefore, each job cost sheet is charged with overhead costs equal to 150% of the direct labor cost relating to the job.

The entry to apply overhead costs to the job cost sheet usually is made when the job is completed, However, overhead costs also should be applied to any jobs that are still in process at the .end of the accounting period. At the end of each month, a summary entry
is made in the general ledger to record all overhead costs applied to jobs during the period, as follows Over- or Underapplled Overhead In our example, actual overhead costs incurred during January amounted to $93,000, while the overhead applied to jobs using the overhead application rate totaled only $90,000;

We should not expect that applied overhead will exactly equal actual overhead because the predetermined overhead application rate is based on estimates.

A debit balance in the Manufacturing Overhead account at month-end indicates that overhead applied to jobs was less than the actual overhead costs incurred during the month. Therefore, adebit balance remaining in the Manufacturing

Overhead account is called under applied overhead. A credit balance remaining in the account indicates that overhead applied to jobs exceeded actual overhead costs; thus a credit balance is termed over applied overhead. The month-end balances remaining in the Manufacturing Overhead account normally are allowed to accumulate throughout the year.

These amounts tend to balance out from month to month. and the amount of overapplied or underapplied overhead at year-end usually is not material in dollar amount. In this case, the year-end balance in the Manufacturing Overhead account may be closed directly to the Cost of Goods Sold. on the grounds that most of the error is applicable to goods sold during the year. If the yearend
balance in the overhead .account is material in dollar amount, it should be apportioned among the Work in Process Inventory. Finished Goods Inventory, and Cost of Goods Sold accounts.

Accounting for Completed Jobs We have now explained how manufacturing costs are charged (debited) to the Work in Process Inventory account and how the costs of specific jobs are separately accumulated on job cost sheets.

As each job is completed, the job cost sheet is removed from the work in process subsidiary ledger and the manufacturing costs on the sheet are totaled to determine the cost of finished goods manufactured.

This cost then is transferred from the Work in Process Inventory account to the Finished Goods Inventory account.

During January, Oak & Glass completed work on job nos. 830 and 831. The entries to record completion of these jobs appear as follows:As sales of the finished .units occur, the unit cost figure will be used in determining the cost of’ goods sold.

For example, the sale of 40 of the French Court dining tables at a total sales price of $48,000 is recorded as follows: Job Order Costing In Service Industries In the preceding discussion, we have emphasized the use of job order costing in manufacturing companies.

However” many service industries also use this method to accumulate the costs of servicing a particular customer. In a hospital. for example. each patient represents a separate ‘job.” and the costs of caring for the patient are accumulated on a job cost sheet.

Costs of such items as medicine,  blood transfusions, and x-rays represent the usage of direct materials; services rendered by doctors are direct labor. The costs of nursing. meals. linen service. and depreciation of the hospital building and equipment all are part of the hospital’s overhead. a hospital, overhead often is applied to each patient’s account ata predetermined daily rate

Posted on November 23, 2015 in Accounting Systems for Measuring Costs

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