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Unformatted text preview: Chapter 4
Accounting for Factory Overhead Learning Objectives
Learning Identify cost behavior patterns. Separate semivariable costs into variable
and fixed components.
and Prepare a budget for factory overhead
costs. Distribute service department factory
overhead costs to production
departments. Learning Objectives
Learning Apply factory overhead using
predetermined Account for actual and applied factory
overhead. Accounting for Factory
Identify cost behavior patterns.
Budgeting factory overhead costs.
Accumulating actual overhead costs.
Apply factory overhead estimates to
production. Calculate and analyze differences
between actual and applied factory
overhead. Cost Behavior Patterns
Cost Variable costs are costs that vary in
proportion to volume changes.
proportion Fixed costs remain constant. Semivariable costs have characteristics
of both fixed and variable costs.
of Type A – remain constant over a range of
production, then change abruptly.
production, Type B – vary continuously but not in direct
proportion to volume changes.
proportion Cost Behavior Patterns
Cost Cost Volume Volume Fixed Variable
Cost Cost Volume Volume Semivariable Type A Semivariable Type B Techniques for Analyzing
Semivariable Observation Method (Account
Classification High-Low Method Scattergraph Method Method of Least Squares Budgeting Factory Overhead
Costs Budgets are management’s operating
plans expressed in quantitative terms.
plans Costs are segregated into fixed and
variable Budgets can be prepared for different
levels of production (flexible budget).
levels Valuable management tool for planning
and controlling costs.
and Accounting for Factory
Overhead Entries are made in the general journal for
indirect materials and indirect labor from the
summary of materials issued and the labor cost
summary. Other factory overhead expenses are recorded
in the general ledger from the invoices and
schedules for fixed costs.
schedules A factory overhead subsidiary ledger may be
used if the number of factory overhead
accounts becomes too large.
accounts Examples of Factory Overhead
Accounts Defective Work
Employee Fringe Benefits
Heat and Light
Materials Handling Overtime Premium
Insurance Factory Overhead Analysis
Sheets These sheets may be
used to keep a
subsidiary record of
analysis Schedule of Fixed Costs
Schedule Fixed costs are assumed not to vary in amount
from month to month.
from Because fixed costs are predictable, schedules
can be prepared in advance.
can A jjournal entry to record the total fixed costs
can be prepared from these schedules.
can Example of Schedule of Fixed
Schedule of Fixed Costs
January February March Depreciation-Machinery
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
Property Tax Total
Total Fixed Costs General Factory Overhead
Expenses When factory overhead expenses are not
identified with a specific department, they
are charged to departments by a process
of May be made for each item of expense
incurred, or expenses may be
accumulated as incurred and the
allocation made at the end of the
accounting Summary of Factory Overhead
Summary of Factory Overhead
Dept. A Dept. B Dept. C Total Expenses
materials $100 $50 $40 $190 Indirect labor 200 150 140 490 Power 150 140 120 410 Depreciation 300 200 150 650 General factory
expenses 150 350 200 700 $900 $890 $650 $2,440 Total
Total Distributing Service
Department Service departments are an essential part of
the organization, but they do not work directly
on the product.
on Production departments perform the actual
manufacturing operations that physically
change the units being processed.
change The costs of the service departments must be
apportioned to the production departments.
apportioned An analysis of the service department’s
relationship to other departments must be
done. Common Bases for Distributing
Service Department Costs
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
production Sequential Distribution or Step-Down Method Distributes service department costs regressively to
other service departments and then to production
departments. Algebraic Distribution Method Distributes costs by simultaneous equations
recognizing the relationship of services rendered by
departments to each other.
departments Applying Factory Overhead to
Production Factory overhead costs may not be known until
the end of the accounting period.
the The cost of a job is needed soon after
completion, so a method to estimate the
amount of factory overhead applied must be
established. This enables companies to bill customers on a
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
Activity-based Costing (ABC) Direct Labor Cost Method
Direct Uses the amount of direct labor cost that has
been charged to the product as the basis for
applying factory overhead.
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
the estimated direct labor hours to be worked.
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
departments where the amount of factory
overhead cost incurred on a job is primarily a
function of the machine time that a job
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 The company must first identify activities in the
factory that create costs. Then a basis or cost driver must be decided
upon to allocate each of the activity cost pools.
upon This approach is best when the company has
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
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
account is closed to factory overhead.
Applied Factory Overhead
XX Under- and Overapplied
Factory After the applied factory overhead account is
closed, the underapplied (debit balance) or
overapplied (credit balance) balance in the
factory overhead account is moved to work in
Under- and Overapplied Factory Overhead XX Factory Overhead
Cost of Goods Sold
Under- and Overapplied Factory Overhead
XX Period Costs and Product
Costs Period Costs All costs that are not assigned to the
product, but are recognized as expense and
charged against revenue in the period
incurred. Product Costs Costs that are included as part of inventory
costs and expensed when goods are sold.
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- Spring '11