Accounting Chapter 3 Notes - selling and administrative...

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Accounting Chapter 3 Notes Manufacturing overhead is an  indirect cost.   This means that it is either impossible or  difficult to trace these costs to a particular product or job. Direct=work in process all manufacturing costs other than direct materials and direct labor are classified as  manufacturing overhead costs.  The most widely used allocation bases in manufacturing are direct labor-hours, direct  labor cost, machine-hours and (where a company has only a single product) units of  product. The predetermined overhead rate is computed before the period begins. The formula for determining the amount of overhead cost to apply to a particular job is:  When the allocation base is direct labor-hours, the formula becomes: The Manufacturing Overhead account operates as a clearing account.  Nonmanufacturing costs should not go into the Manufacturing Overhead account.
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Unformatted text preview: selling and administrative costs should be treated as period expenses and charged directly to the income statement. Note that when the allocation base is dollars the predetermined overhead rate is expressed as a percentage of the allocation base. When dollars are divided by dollars, the result is a percentage. underapplied happens when actual cost is higher than predetermined cost (there’s a debit in MOH). overapplied happens when actual cost is lower than predetermined cost (there’s a credit in MOH). Because overhead was underapplied, not enough cost was applied to jobs. Hence, the cost of goods sold was understated. Adding the underapplied overhead to the cost of goods sold corrects this understatement....
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