For managerial accounting purposes manufacturing

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Unformatted text preview: anagerial accounting purposes, manufacturing costs may be assigned to the product using any one of three product costing methods. We discussed two of those earlier – actual costing and normal costing. The third, standard costing, we will discuss later in the semester. 6 Example (Actual vs Normal Costing): Job A, which was completed during the year, used $500 of direct materials and $300 of direct labor as well as 10 machine hours to complete. The following information is available regarding the firm’s total overhead costs for the year: Budgeted Overhead Actual $10,000 $12,000 100 96 Allocation Base (machine hours) What is the total cost of Job A using a) Normal costing ? b) Actual costing ? 7 Normal Costing Direct Materials 500 Actual Costing 500 Direct Labor 300 300 Overhead 10,000 x 10 = 100 1,000 12,000 x 10 = 96 1,800 Total Cost Budgeted OH Allocation Rate 1,250 2,050 Actual OH Allocation Rate 8 Over- or Under-Applied Overhead Costs Typically, with normal costing, the amount of overhead applied to all of the jobs worked on during a period (both those completed and those remaining in-process at the end of the period) will not equal the actual amount of overhead costs incurred. The difference between the actual overhead costs incurred and the costs applied/allocated to the jobs (referred to as a “variance”) is Over-applied if overhead applied > actual overhead incurred Under-applied if overhead applied < actual overhead incurred Question Referring to Job A, from the previous example, under normal costing was there a variance? If so what was the amount and was the overhead over- or under-applied? 9 Accounting for Overhead Cost Variances When a firm uses a normal costing system, its accounting records will contain two additional accounts: an overhead control account and an overhead applied (allocated) account: Various Accounts (Accum Dep’n, Wages Payable, etc.) XX Overhead Contr...
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This document was uploaded on 01/24/2014.

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