ACT 202 _ Chapter 3- Updated

Chapter ThreeSystems Design: Job-Order Costing

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Types of Product Costing SystemsProcess CostingJob-order Costing

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Types of Product Costing SystemsProcess CostingJob-order Costing

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Comparing Process and Job-Order Costing

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RB22

Job-OrderProcess

Number of jobs workedManySingle Product

Cost accumulated byIndividual JobDepartment

Average cost computed byJobDepartment

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Manufacturing OverheadJob No. 1Job No. 2Job No. 3Charge direct material and direct labor costs to each job as work is performed.Job-Order Costing An OverviewDirect MaterialsDirect Labor

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Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.Direct Manufacturing CostsDirect MaterialsDirect LaborJob No. 1Job No. 2Job No. 3Manufacturing Overhead

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The Job Cost Sheet

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Measuring Direct Materials Cost

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Measuring Direct Materials Cost

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PearCo Job Cost Sheet

Job Number A - 143Date Initiated 3-4-05

Date Completed

Department B3Units Completed

Item Wooden cargo crate

Direct MaterialsDirect LaborManufacturing Overhead

Req. No.AmountTicketHoursAmountHoursRateAmount

X7-6890$116

Cost SummaryUnits Shipped

Direct Materials$116DateNumberBalance

Direct Labor

Manufacturing Overhead

Total Cost

Unit Product Cost

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Measuring Direct Labor Costs

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PearCo Employee Time Ticket

Time Ticket No. 36Date3/5/05

EmployeeI. M. SkilledStation42

StartingEndingHoursHourly

TimeTimeCompletedRateAmountJob No.

080016008.00$11.00$88.00A-143

Totals8.00$11.00$88.00A-143

SupervisorC. M. Workman

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Job-Order Cost Accounting

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Date Completed

Department B3Units Completed




X7-6890$116368$88



Direct Labor$88

Manufacturing Overhead

Total Cost

Unit Product Cost

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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:It is impossible or difficult to trace overhead costs to particular jobs.Manufacturing overhead consists of many different items ranging from the grease used in machines to production managers salary.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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

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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.The Need for a POHR$

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Actual amount of the allocation based upon the actual level of activity.Based on estimates, and determined before the period begins.Application of Manufacturing Overhead

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For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.Overhead Application RatePOHR = $4.00 per DLH

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Date Completed3-5-05

Department B3Units Completed2




X7-6890$116368$888$4$32



Direct Labor$88

Manufacturing Overhead$32

Total Cost

Unit Product Cost

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Date Completed3-5-05

Department B3Units Completed2




X7-6890$116368$888$4$32



Direct Labor$88

Manufacturing Overhead$32

Total Cost$236

Unit Product Cost$118

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Interpreting the Average Unit CostThe average unit cost should not be interpretedas the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.

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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.

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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.

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Pred. ovhd. rate $760,000/20,000hours$38

Direct materials$200

Direct labor$15x10 hours$150

Manufacturing overhead$38x10 hours$380

Total cost$730

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Job-Order CostingDocument Flow SummaryA sales order is the basis of issuing a production order. A production order initiates work on a job.

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Job-Order CostingDocument Flow SummaryJob Cost SheetsMaterials RequisitionManufacturing Overhead AccountDirect materialsIndirect materialsMaterials used may be either direct or indirect.

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Job-Order CostingDocument Flow SummaryJob Cost SheetsEmployee Time TicketManufacturing Overhead AccountAn employees time may be either direct or indirect.Direct LaborIndirect Labor

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Job-Order CostingDocument Flow SummaryManufacturing Overhead AccountOther Actual OH ChargesJob Cost SheetsApplied OverheadMaterials RequisitionEmployee Time Ticket

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Job-Order Costing: The Flow of CostsThe 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.

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Raw MaterialsMaterialPurchasesMfg. OverheadWork in Process (Job Cost Sheet)ActualAppliedDirect MaterialsDirect MaterialsIndirect MaterialsIndirect MaterialsThe Purchase and Issue of Raw Materials

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Cost Flows Material Purchases Raw material purchases are recorded in an inventory account.

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GENERAL JOURNAL

DateDescriptionPost. Ref.DebitCredit

Raw MaterialsXXXXX

Accounts PayableXXXXX

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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 Raw Materials.

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GENERAL JOURNAL


Work in ProcessXXXXX

Manufacturing OverheadXXXXX

Raw MaterialsXXXXX

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Mfg. OverheadSalaries and Wages PayableWork in Process (Job Cost Sheet)Direct MaterialsIndirect MaterialsActualAppliedThe Recording of Labor Costs

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The Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

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GENERAL JOURNAL




Salaries and Wages PayableXXXXX

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Mfg. OverheadSalaries and Wages PayableWork in Process (Job Cost Sheet)Direct MaterialsDirect LaborDirect LaborIndirect MaterialsActualAppliedIndirect LaborIndirect LaborRecording Actual Manufacturing OverheadOther Overhead

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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.

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GENERAL JOURNAL




Property Taxes PayableXXXXX

Prepaid InsuranceXXXXX

Accumulated DepreciationXXXXX

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Mfg. OverheadSalaries and Wages PayableWork in Process (Job Cost Sheet)Direct MaterialsDirect LaborDirect LaborIndirect MaterialsActualAppliedIndirect LaborIndirect LaborApplying Manufacturing OverheadOther OverheadIf actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

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Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs.

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GENERAL JOURNAL




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Accounting for Nonmanufacturing CostNonmanufacturing 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.

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

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GENERAL JOURNAL


Salaries ExpenseXXXXX

Salaries PayableXXXXX

Advertising ExpenseXXXXX


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Finished GoodsWork in Process (Job Cost Sheet)Direct MaterialsDirect LaborOverhead AppliedTransferring Completed Units

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

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GENERAL JOURNAL


Finished GoodsXXXXX


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Finished GoodsCost of Goods SoldWork in Process (Job Cost Sheet)Direct MaterialsDirect LaborOverhead AppliedCost of Goods Mfd. Cost of Goods Mfd. Transferring Units Sold

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Transferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.

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GENERAL JOURNAL


Accounts ReceivableXXXXX

SalesXXXXX

Cost of Goods SoldXXXXX

Finished GoodsXXXXX

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Problems of Overhead ApplicationThe 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 exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

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PearCos 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 PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Application ExampleOverhead Applied During the PeriodApplied Overhead = POHR Actual Direct Labor HoursApplied Overhead = $4.00 per DLH 170,000 DLH = $680,000

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PearCos 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 PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Application ExampleOverhead Applied During the PeriodApplied Overhead = POHR Actual Direct Labor HoursApplied Overhead = $4.00 per DLH 170,000 DLH = $680,000

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Disposition of Under- or Overapplied OverheadOR

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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.Quick Check Overhead Applied $4.00 per hour 290,000 hours = $1,160,000Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

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Allocating Under- or Overapplied Overhead Between AccountsAssume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:

Table 1

PeriodCash InterestEffective InterestUnamortized DiscountCarrying ValueAmountPercent of TotalAllocation of $30,000

Initial values . . . . . . . . . . . . . . . . .$265,355.07$734,644.93Gift certificates issued$5,200Work in process$68,00010%$3,000

1$30,000.00$73,464.49221,890.58778,109.42Gift certificates redeemed1,300Finished Goods204,00030%9,000

230,000.0077,810.94174,079.63825,920.37Liability for gift certificates$3,900Cost of Goods Sold408,00060%18,000

330,000.0082,592.04121,487.60878,512.40Total$680,000100%$30,000

430,000.0087,851.2463,636.36936,363.64CDs sold350,000

530,000.0093,636.350.001,000,000.00Redemption rate5%

Estimated T-shirts needed17,500

T-shirts issued1,800

Estimated future claims15,700

Cost per T-shirt$7.00

Estimated liability$109,900

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Services meet customer needs2.4

DescriptionDebitCreditBook value of net assets$775,000,00040%$310,000,000

Estimated liability for warranties1,800Fair value of net assets800,000,00040%320,000,000

Cash1,800Excess of FV over BV25,000,00040%10,000,000

Depreciable asset increment0.00%0.0

Cost of goods sold560,000Depreciable life1616

Inventory560,000Amortization per year0.00.0

Estimated warranty expense7,500

Estimated liability for warranties7,500Fair value of net assets$320,000,000

Cost of investment400,000,000

Goodwill$80,000,000

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

Table 1





330,000.0082,592.04121,487.60878,512.40Total$680,000100%$30,000

430,000.0087,851.2463,636.36936,363.64CDs sold350,000

530,000.0093,636.350.001,000,000.00Redemption rate5%






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Goodwill$80,000,000

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Allocating Under- or Overapplied Overhead Between Accounts

Table 1





330,000.0082,592.04121,487.60878,512.40Total$680,000100%$30,000

430,000.0087,851.2463,636.36936,363.64CDs sold350,000

530,000.0093,636.350.001,000,000.00Redemption rate5%






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Goodwill$80,000,000

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GENERAL JOURNAL


Manufacturing Overhead30,000

Work in Process Inventory3,000

Finished Goods Inventory9,000

Cost of Goods Sold18,000

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Overapplied and Underapplied Manufacturing Overhead - SummaryPearCos Method

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Alternative 1Alternative 2

If ManufacturingClose to Cost

Overhead is . . .of Goods SoldAllocation

UNDERAPPLIEDINCREASEINCREASE

Cost of Goods SoldWork in Process

(Applied OH is lessFinished Goods

than actual OH)Cost of Goods Sold

OVERAPPLIEDDECREASEDECREASE

Cost of Goods SoldWork in Process

(Applied OH is greaterFinished Goods

than actual OH)Cost of Goods Sold

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Multiple Predetermined Overhead RatesTo this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate.Large companies often use multiple predetermined overhead rates.

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Job-Order Costing in Service CompaniesJob-order costing is used in many different types of service companies.

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End of Chapter 3

3-**Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach (also called a full cost approach) to calculating product costs known as job-order costing.3-**A process costing system is best used by companies that produce many units of a single product and when one unit of output is indistinguishable from any other unit of output. Because the units of output are identical, the company will probably use an average cost system to determine product cost.

3-**A company would use a job order costing system when many different products are produced each period. The products are usually manufactured to customers specifications and are unique in nature. 3-**This table presents an overview of the differences between a job-order and process costing system. Notice that costs are accumulated by the job in a job-order system and by department in the process system. If you think of building a house, you can see how easy it is to accumulate costs for a particular house, even though you may be building more than one house at a time. If you think of mixing Coca-Cola, costs would naturally be accumulated by the department working on the current batch.3-**In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed.3-**Manufacturing overhead (including indirect materials and indirect labor) represents other manufacturing costs like the power used to run the machinery in the factory. Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate.3-**The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. We will look at a job cost sheet used by a hypothetical company called PearCo. The company has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labor, and manufacturing overhead. In addition, we have a section to summarize total costs of the job. A job number uniquely identifies each job. Direct material, direct labor and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.3-**Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials. Here is the materials requisition form completed for job A - 143. The requisition is number X7 - 6890. The worker has requested twelve 2 x 4s, 12 feet long, and twenty 1 x 6s, 12 feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the store room will issue the lumber once the materials requisition form has been properly authorized.3-**Once the materials have been issued by the store room, they are charged to the job cost sheet for job number A 143. We have a proper reference for the requisition number and the total amount. If we need to look at the details of the $116 cost, we can ask to see materials requisition form X7-6890.

The direct materials were posted to the summary section of the job cost sheet.3-**Here is the time ticket for an employee who worked eight hours on job A 143. The employees hourly pay rate is $11, so the total labor cost charged to the job will be $88. The time ticket, number 36, serves as the major source document for labor costs charged to this job. Lets look at the labor posting to the job cost sheet.3-**The Accounting Department records the labor costs from each time ticket onto the job cost sheet. On the job cost sheet, we can see that time ticket number 36 posted 8 hours to job A 143. The total amount of direct labor cost is $88. This amount is also posted to the summary section of the job cost sheet.3-**Part IManufacturing overhead is applied to all jobs that are in process. We apply overhead using a base we believe causes overhead costs to be incurred. Some companies allocate manufacturing overhead using direct labor hours or machine hours.

Part IIWe must allocate overhead costs to jobs for a variety of reasons. First, it is difficult, if not impossible, to actually trace overhead costs to a particular job. The cost of grease for machinery to manufacture our product is part of our manufacturing costs. It would be impossible to accurately trace the amount of grease consumed to manufacture one unit of output. Manufacturing overhead also includes a number of different costs and it would be very difficult to gather all of them together in time to charge them to a particular job. A job may be complete and sold before we can determine the actual overhead costs incurred. Finally, many types of overhead are fixed in nature even though output fluctuates during the period.3-**To facilitate the allocation of manufacturing overhead to each job, we calculate a predetermined overhead rate before the period begins. The rate is calculated by dividing the total estimated manufacturing overhead for the coming period by the estimated total units of the allocation base. If our allocation base is machine hours, we would estimate the total number of machine hours used in production in the coming period.

Ideally, the allocation base should be a cost driver, that is, it causes overhead to be incurred.

3-**Predetermined overhead rates that rely upon estimated data are often used because (1) actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period; (2) actual overhead costs can fluctuate seasonally, thus misleading decision makers; and (3) it simplifies record keeping.3-**We calculate the predetermined overhead rate before the period begins. As we work on a particular job, we apply overhead by multiplying the predetermined rate times the actual level of activity. If overhead is applied on the basis of machine hours, we would apply overhead by multiplying the predetermined rate times the actual number of machine hours used on a particular job.3-**Part IHere is our equation for calculating the predetermined manufacturing overhead rate.

Part IIPearCos predetermined overhead rate is $4 per direct labor hour. Part IIISo, at PearCo, each job will be charged $4 of overhead for each hour of direct labor worked.

Lets see how this works.3-**Our predetermined overhead rate is $4 per direct labor hour, so we will apply $32 of overhead to job number A 143. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section. 3-**The total direct material, direct labor, and manufacturing overhead costs assigned to Job A-143 is $236. Since this particular job included 2 units of production, the average cost per unit is $118. We calculated the average by dividing the total cost of $236 by the 2 crates produced.

3-**We cannot say that the average cost per crate, in the future, will be $118. If a third crate were to be produced, we would not add any additional fixed overhead cost, so the incremental cost of an additional unit may be somewhat less than $118. 3-**This problem may take a while to solve, but it will be well worth your time to work it carefully.3-**The correct answer is $730. You can see the costs incurred for direct materials, direct labor and manufacturing overhead applied to job WR53 in the blue box.3-**The entire accounting process begins when a sales order is received from a customer. Once the sales order is received, a production order is drafted to initiate work on a job.

3-**From the production order, we are able to determine the direct and indirect materials that we will need to requisition from the store room. We now know that the materials requisition form is a critical source document in the preparation of the job cost sheet. Direct material costs are charged to specific jobs. Indirect material costs are included in manufacturing overhead. 3-**As employees work on the job covered by the production order, time tickets are prepared for recording both direct and indirect labor costs. Direct labor costs are charged to specific jobs. Indirect labor costs are included in manufacturing overhead. 3-**Indirect materials and indirect labor are parts of manufacturing overhead. Other overhead costs are charged to the manufacturing overhead account as incurred. As we have seen, overhead is applied to the job cost sheet.3-**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.3-**Part IWhen raw materials are purchased they are debited to the raw materials inventory account and credited to accounts payable.

Part IIThe cost of direct material requisitions is debited to Work in Process and added to the job cost sheet which serve as a subsidiary ledger.

Part IIIIndirect materials are removed from raw materials inventory with a credit and debited to the manufacturing overhead account.3-**Here is an example of the general journal entry to record the purchase of raw materials on account. We debit raw materials and credit accounts payable.3-**When materials are requisitioned from raw materials inventory, we debit work in process (job cost sheet) for direct materials, and debit manufacturing overhead for indirect materials.3-**Part IDirect labor is debited to Work in Process and added to the job cost sheet which serves as a subsidiary ledger and credited to salaries and wages payable.

Part IIIndirect labor is debited to Manufacturing Overhead and credited to salaries and wages payable.3-**The cost of direct labor is debited to Work in Process account, while the indirect labor is debited to the Manufacturing Overhead account. The cost of labor (direct and indirect) is credited to the Salaries and Wages Payable account.3-**Additional manufacturing overhead amounts are debited to the manufacturing overhead account. The debit side of the manufacturing overhead account represents actual overhead incurred during the period. The credit side of the entry is the various liability accounts, for example, accounts payable and property taxes payable. The credit side will also include prepaid assets (like prepaid insurance) and contra accounts for events like depreciation.3-**This journal entry represents the accumulation of other actual overhead amounts like property taxes on the manufacturing plant, insurance on the plant structure and depreciation of manufacturing assets.3-**When we apply overhead to a particular job, we debit work in process inventory (through the job cost sheet) and credit the manufacturing overhead account. Amounts on the credit side of the manufacturing overhead account represent overhead applied.

It is not likely that actual and applied overhead will be equal during a period. We normally make an adjusting entry at the end of the period to reconcile actual and applied overhead.3-**This journal entry shows the application of overhead to work in process inventory.3-**We previously discussed the treatment of selling, general, and administrative salaries expense during the period. Nonmanufacturing costs are charged to the respective expense accounts (marketing, selling, administrative) in the period the expenses were incurred.3-**This journal entry illustrates the expensing of nonmanufacturing costs in the current period.3-**The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period. As a job is completed, its costs are transferred from the work in process inventory to finished goods inventory.3-**The transfer is accomplished with a debit to finished goods inventory and a credit to work in process inventory.3-**When a finished job is sold to the customer, the cost of that job is transferred from finished goods inventory to cost of good sold. Recall that cost of goods sold is an income statement account. If only a portion of the units associated with a particular job are shipped, then the unit cost figure from the job cost sheet is used to determine the amount of the journal entry.3-**Assuming the company uses a perpetual inventory system, two journal entries are required to record the sale.

The first entry is to debit either accounts receivable or cash and credit sales for the selling price of the job completed.

The second entry is to debit cost of goods sold and credit finished goods inventory for the cost incurred to complete the job.

The difference between the selling price and cost is the companys gross margin on the job.3-**When we apply overhead on the basis of a predetermined overhead rate, there is always the chance that the amount of overhead applied will be different from the amount of overhead actually incurred during the period. When there is a difference we refer to the amount as either underapplied overhead or overapplied overhead.

Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

3-**Part ILets assume that PearCo incurred actual overhead of $650,000 during the period and worked a total of 170,000 direct labor hours. PearCo applies overhead at the rate of $4 per direct labor hour worked. How much overhead did PearCo apply to jobs during the period? Part IIPearCo would have applied $680,000 of overhead during the period. That is $4 per direct labor hour times the 170,000 direct labor hours actually worked. Can you see our problem?

3-**The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. PearCo incurred actual overhead of $650,000 and applied $680,000, so the company overapplied $30,000 of overhead for the year. How do we dispose of this overapplied overhead? 3-**There are two ways to dispose of over- or underapplied overhead. The more complex approach is to allocate a portion of the over- or underapplied overhead to work in process inventory, finished goods inventory, and cost of goods sold. The allocation would be based on the relative dollar value in each of the three accounts involved.

An easier way to deal with the problem, and the method PearCo uses, is to adjust cost of goods sold for the entire amount of the over- or underapplied overhead.3-**The correct answer is $50,000 underapplied overhead. Tiger incurred $1,210,000 of actual overhead but applied only $1,160,000, thus the company underapplied its overhead costs during the period.3-**We may elect to allocate the over- or underapplied overhead to ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold. Lets assume that at the end of the period PearCo had the following overhead costs in each of the accounts shown.3-**We will complete the following allocation of the $30,000 of overapplied overhead. We will reduce ending Work in Process Inventory by $3,000, Finished Goods Inventory by $9,000, and Cost of Goods Sold for the period by $18,000. 3-**The journal entry to record the allocation is to debit Manufacturing Overhead for $30,000, credit Work in Process Inventory for $3,000, credit Finished Goods Inventory for $9,000, and credit Cost of Goods Sold for $18,000.3-**We have provided a good study aid for dealing with overapplied or underapplied overhead. We have shown the impact of both the allocation approach to the solution to the problem and the direct adjustment to cost of goods sold approach. It is a good idea to review this chart before your next exam.3-**Part IWe have assumed that the company has used one single predetermined overhead rate for the entire factory.

Part IIMany large companies use multiple predetermined overhead rates.

Part IIIUsing multiple overhead rates can create more complexity. However, the use of multiple rates promotes greater accuracy in the allocation process because it gives formal recognition to differences across departments in how overhead costs are incurred.3-**In a law firm, each client represents a job. Legal forms and similar inputs represent direct materials. The time expended by attorneys represents direct labor. The costs of secretaries, clerks, rent, depreciation, and so forth, represent the overhead.3-**End of chapter 3.

Documents

ACT 202 _ Chapter 3- Updated