ch04 - Chapter 4 Chapter Accounting for Factory Overhead...

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Unformatted text preview: Chapter 4 Chapter Accounting for Factory Overhead Learning Objectives Learning Identify cost behavior patterns. Separate semivariable costs into variable Separate and fixed components. and Prepare a budget for factory overhead Prepare costs. costs. Distribute service department factory Distribute overhead costs to production departments. departments. Learning Objectives Learning Apply factory overhead using Apply predetermined rates. predetermined Account for actual and applied factory Account overhead. overhead. Accounting for Factory Overhead Overhead Identify cost behavior patterns. Budgeting factory overhead costs. Accumulating actual overhead costs. Apply factory overhead estimates to Apply production. production. Calculate and analyze differences Calculate between actual and applied factory overhead. overhead. Cost Behavior Patterns Cost Variable costs are costs that vary in Variable proportion to volume changes. proportion Fixed costs remain constant. Semivariable costs have characteristics Semivariable of both fixed and variable costs. of Type A – remain constant over a range of Type production, then change abruptly. production, Type B – vary continuously but not in direct Type proportion to volume changes. proportion Cost Behavior Patterns Cost Cost Cost Volume Volume Fixed Variable Cost Cost Volume Volume Semivariable Type A Semivariable Type B Techniques for Analyzing Semivariable Costs Semivariable Observation Method (Account Observation Classification Method) Classification High-Low Method Scattergraph Method Method of Least Squares Budgeting Factory Overhead Costs Costs Budgets are management’s operating Budgets plans expressed in quantitative terms. plans Costs are segregated into fixed and Costs variable components. variable Budgets can be prepared for different Budgets levels of production (flexible budget). levels Valuable management tool for planning Valuable and controlling costs. and Accounting for Factory Overhead Overhead Entries are made in the general journal for Entries indirect materials and indirect labor from the summary of materials issued and the labor cost summary. summary. Other factory overhead expenses are recorded Other in the general ledger from the invoices and schedules for fixed costs. schedules A factory overhead subsidiary ledger may be factory used if the number of factory overhead accounts becomes too large. accounts Examples of Factory Overhead Accounts Accounts Defective Work Depreciation Employee Fringe Benefits Fuel Heat and Light Indirect Labor Indirect Materials Insurance Janitorial Service Lubricants Maintenance Materials Handling Overtime Premium Plant Security Power Property Tax Rent Repairs Small Tools Spoilage Supplies Telephone/Fax Water Workers’ Compensation Workers’ Insurance Insurance Factory Overhead Analysis Sheets Sheets These sheets may be These used to keep a subsidiary record of factory overhead expenses. expenses. Expense-type Expense-type analysis spreadsheet analysis Department-type Department-type analysis spreadsheet analysis Schedule of Fixed Costs Schedule Fixed costs are assumed not to vary in amount Fixed from month to month. from Because fixed costs are predictable, schedules Because can be prepared in advance. can A jjournal entry to record the total fixed costs ournal can be prepared from these schedules. can Example of Schedule of Fixed Costs Costs Schedule of Fixed Costs January February March Depreciation-Machinery Dept. A Dept. $300 $300 $300 Dept. B Dept. 200 200 200 $500 $500 $500 Dept. A Dept. $280 $280 $280 Dept. B Dept. 270 270 270 $550 $550 $550 $1,050 $1,050 $1,050 Total Total Property Tax Total Total Total Fixed Costs General Factory Overhead Expenses Expenses When factory overhead expenses are not When identified with a specific department, they are charged to departments by a process of allocation. of May be made for each item of expense May incurred, or expenses may be accumulated as incurred and the allocation made at the end of the accounting period. accounting Summary of Factory Overhead Summary Summary of Factory Overhead Dept. A Dept. B Dept. C Total Expenses Indirect Indirect materials materials $100 $50 $40 $190 Indirect labor 200 150 140 490 Power 150 140 120 410 Depreciation 300 200 150 650 General factory General expenses expenses 150 350 200 700 $900 $890 $650 $2,440 Total Total Distributing Service Department Expenses Department Service departments are an essential part of Service the organization, but they do not work directly on the product. on Production departments perform the actual Production manufacturing operations that physically change the units being processed. change The costs of the service departments must be The apportioned to the production departments. apportioned An analysis of the service department’s An relationship to other departments must be done. done. Common Bases for Distributing Service Department Costs Service Service Departments Basis for Distribution Building Maintenance Floor space occupied by other departments Inspection and Packing Production volume Machine Shop Value of machinery and equipment Human Resources Number of workers in departments served Purchasing Number of purchase orders Shipping Quantity and weight of items shipped Stores Units of materials requisitioned Tool Room Total direct labor hours in departments served Methods of Distributing Costs Methods Direct Distribution Method Service department costs are allocated only to Service production departments. production Sequential Distribution or Step-Down Method Distributes service department costs regressively to Distributes other service departments and then to production departments. departments. Algebraic Distribution Method Distributes costs by simultaneous equations Distributes recognizing the relationship of services rendered by departments to each other. departments Applying Factory Overhead to Production Production Factory overhead costs may not be known until Factory the end of the accounting period. the The cost of a job is needed soon after The completion, so a method to estimate the amount of factory overhead applied must be established. established. This enables companies to bill customers on a This more timely basis and to prepare bids for new contracts more accurately. contracts Methods of Predetermined Factory Overhead Rates Factory Direct Labor Cost Method Direct Labor Hours Method Machine Hours Activity-based Costing (ABC) Direct Labor Cost Method Direct Uses the amount of direct labor cost that has Uses been charged to the product as the basis for applying factory overhead. applying Job 100 Direct materials $1,000 Direct labor 3,000 Factory overhead (50% of direct labor $) 1,500 Total cost of completed job $5,500 Direct Labor Hour Method Direct Estimated factory overhead cost is divided by Estimated the estimated direct labor hours to be worked. the Job 100 Direct materials $1,000 Direct labor (500 hours) 3,000 Factory overhead (500 hours @ $4) 2,000 Total cost of completed job $5,500 Machine Hour Method Machine This method best serves highly automated This departments where the amount of factory overhead cost incurred on a job is primarily a function of the machine time that a job requires. requires. Job 100 Direct materials $1,000 Direct labor (500 hours) 3,000 Factory overhead (300 machine hours @ $10) 3,000 Total cost of completed job $7,000 Activity-Based Costing Method Method The company must first identify activities in the The factory that create costs. Then a basis or cost driver must be decided Then upon to allocate each of the activity cost pools. upon This approach is best when the company has This significant nonvolume-related costs in its plant which are not caused by traditional cost drivers such as labor hours and machine hours. such Accounting for Actual and Applied Factory Overhead Applied Entry to apply estimated factory overhead to production Work in Process XX Applied Factory Overhead Applied XX At the end of the period, the applied factory overhead At account is closed to factory overhead. account Applied Factory Overhead Factory Overhead Factory XX XX Under- and Overapplied Factory Overhead Factory After the applied factory overhead account is After closed, the underapplied (debit balance) or overapplied (credit balance) balance in the factory overhead account is moved to work in process. process. Under- and Overapplied Factory Overhead XX Factory Overhead Factory Cost of Goods Sold Under- and Overapplied Factory Overhead Under- XX XX XX Period Costs and Product Costs Costs Period Costs All costs that are not assigned to the All product, but are recognized as expense and charged against revenue in the period incurred. incurred. Product Costs Costs that are included as part of inventory Costs costs and expensed when goods are sold. costs ...
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This note was uploaded on 10/16/2011 for the course ACCT ACTN taught by Professor Vanderbeck during the Spring '11 term at Abu Dhabi University.

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