18,000 In short, all actual manufacturing overhead costs are debited to the Manufacturing Overhead account as they are incurred. As we have noted, actual manufacturing overhead costs are debited to the account as they are incurred throughout the year.
Schedules of Cost of Goods Manufactured and Cost of Goods Sold
The cost of goods manufactured represents the cost of the goods completed during the period and transferred from Work in Process to Finished Goods. Notice that the cost of goods sold on this statement is carried over from Exhibit 3–8.
Underapplied and Overapplied Overhead—A Closer Look
Note that when the allocation base is dollars (such as direct materials cost in the case of Black & Howell) the predetermined overhead rate is expressed as a percentage of the allocation base. The Turbo Crafters and Black & Howell examples demonstrate one way to calculate underapplied or overapplied overhead. However, another equivalent method of determin- ing the amount of underapplied or overapplied overhead is to properly analyze the Manu- facturing Overhead T-account.
If we return to the Ruger Corporation example and look at the Manufacturing Overhead T-account in Exhibit 3–7, you will see that there is a debit balance of $5,000. In this case, the applied overhead costs (the credits) are less than the actual overhead costs (the debits) by $5,000—hence, the debit balance indicates that manufacturing overhead is underapplied. In other words, if there is a debit balance in the Manufacturing Overhead account of X dollars, then the overhead is underapplied by X dollars.
On the other hand, if there is a credit balance in the Manufacturing Overhead account of Y dollars, then the overhead is overapplied by Y dollars.
Closed Proportionally to Work in Process, Finished Goods, and Cost of Goods Sold Closing underapplied or overapplied overhead proportionally to Work
The first step is to take the total overhead cost applied to production during the period and break it into three pieces—the portion included in Work in Process at the end of the period, the portion included in Finished Goods at the end of the period, and the portion applied to Cost of Goods Sold during the period. E X H I B I T 3 – 1 1 Ruger Corporation: Closing Underapplied Overhead Proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Similarly, 16.67% of the total remains in Finished Goods and 50% is included in Cost of Goods Sold.
Work in Process is allocated $1,666.50 of underapplied over- head, whereas Finished Goods and Cost of Goods Sold are allocated $833.50 and. Closing the underapplied or overapplied overhead to Work in Process, Finished Goods, and Cost of Goods Sold is more accurate than the simpler approach of closing it out to Cost of Goods Sold. For example, the simpler approach overstates Ruger Corporation’s Cost of Goods Sold by and understates its net operating income by the same amount.
This model can be very helpful in understanding how manufactur- ing costs flow through a normal costing system and finally end up as Cost of Goods Sold on the income statement.
Summary
Credited for direct labor added to Work in Process Credited for in- direct labor added to Manufacturing Overhead Raw Materials Debited for the. Credited for direct materials added to Work in Process Credited for indirect materials added to Manufacturing Overhead. For the current year, the company’s predetermined overhead rate was based on a cost formula that esti- mated $450,000 of total manufacturing overhead for an estimated activity level of 75,000 machine- hours.
Depreciation was recorded for the year relates to factory assets, and 20% . relates to selling and administrative assets). Insurance expired during the year relates to factory operations, and the remain- ing 30% relates to selling and administrative activities). Jobs costing $900,000 to manufacture according to their job cost sheets were completed during the year.
Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
Review Problem: The Flow of Costs in a Job-Order Costing System
Due to greater than expected demand for its products, the company worked 80,000 machine-hours on all jobs during the year. Post the entries in (1) above to T-accounts (don’t forget to enter the beginning balances in the inventory accounts). Do not allocate the balance between Work in Process, Finished Goods, and Cost of Goods Sold.
Glossary
Questions
Applying Excel
Check your worksheet by changing the estimated total amount of the allocation base in the Data area to 60,000 machine-hours, keeping all of the other data the same as in the original example. If your worksheet is operating properly, the predetermined overhead rate should now be $5.00 per machine-hour. If you do not get this answer, find the errors in your worksheet and correct them.
The Foundational 15
Exercises
Assume that the company’s underapplied or overapplied overhead is closed to Cost of Goods Sold. EXERCISE 3–6 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement LO3–3. Assume that the company’s underapplied or overap- plied overhead is closed to Cost of Goods Sold.
Assume that the underapplied or overapplied overhead is closed proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Compute the amount of underapplied or overapplied overhead for the year and show the bal- ance in your Manufacturing Overhead T-account. Prepare a journal entry to close the com- pany’s underapplied or overapplied overhead to Cost of Goods Sold.
If 10,000 of the custom-made machined parts are shipped to the customer in February, how much of this job’s cost will be included in cost of goods sold for February.
Problems
Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold.
Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts). Compute an ending balance in each account. Is Manufacturing Overhead underapplied or overapplied for the year. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Prepare an income statement for the year. Do not prepare a schedule of cost of goods manu- factured; all of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.). Make an entry in the T-accounts to close any balance in the Studio Overhead account to Cost of Goods Sold. If done correctly, the cost of goods manu- factured from your schedule should agree with which of the above transactions.
If done correctly, the unadjusted cost of goods sold from your schedule should agree with which of the above transactions.
Cases
Videos that cost $550,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.
Appendix 3A: Job-Order Costing: A Microsoft Excel-Based Approach
The term net implies that the acquisition cost of property, plant, and equipment is being reported net of accumulated depreciation. The underlying explanations for each trans- action are as follows (each transaction includes a parenthetical reference to its row within the Microsoft Excel spreadsheet):. row 8) When raw materials are used in production, it decreases Raw Materials by. Sapphire Company: Completed Transaction Analysis. indirect materials of $8,000 are added to Manufacturing Overhead. Notice that actual manufacturing overhead costs, such as the $8,000 of indirect materials, are not added to Work in Process. As you will see in a later transaction, manufacturing overhead is applied to Work in Process using the predetermined overhead rate. The direct labor cost of $68,000 increases Work in Process, whereas the indirect labor cost of $45,000 increases Manufacturing Overhead. The $22,000 paid to employees working in sell- ing and administrative roles is a period cost that should be recorded on January’s income statement. Because the income statement is embedded in Retained Earnings, we decrease Retained Earnings by $22,000. row 10) The utility costs support production, so they are treated as a product cost rather than a period cost. The increase in Retained Earnings reflects the fact that we are decreasing Cost of Goods Sold (which increases net operating income).
The transactions recorded in Exhibit 3A–2 can be used to create schedules of cost of goods manufactured and cost of goods sold. Notice that the cost of goods manufactured of $235,000 as shown in Exhibit 3A–3 equals the cost of goods manufactured mentioned in transaction “i” and recorded in row 15 of Exhibit 3A–2. In the schedule of cost of goods sold, we subtract overapplied overhead of $5,700 from unadjusted cost of good sold because overapplied overhead means that too much overhead was added to production during the period, and hence, the cost of goods sold was overstated.
In Exhibit 3A–2, we add overapplied overhead to retained earnings (see row 19) because lowering cost of goods sold increases net operating income, which in turn increases retained earnings.
Appendix 3A: Exercises and Problems
Depreciation was recorded for the month related to factory equipment, and the remainder related to selling and administrative equipment). Prepaid insurance expired during the month related to production, and 25% . related to selling and administration). Various jobs costing a total of $190,000 were completed during the month and transferred to Finished Goods.
Depreciation recorded on property, plant, and equipment related to manufac- turing equipment and 30% related to assets that support selling and administration). Prepaid insurance expired during the month related to production, and 20% . related to selling and administration). Manufacturing overhead applied to production Calculate the ending balances that would be reported on the company’s balance sheet on January 31. You can derive your answers using Microsoft Excel and Exhibit 3A–2 as your guide, or you can use paper, pencil, and a calculator. Hint: Be sure to calculate the underapplied or overapplied overhead and then account for its affect on the balance sheet.) 2. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
Prepaid insurance expired during the year related to production of videos, and 30% related to marketing and administrative activities).