100%(1)1 out of 1 people found this document helpful
This preview shows page 10 - 12 out of 16 pages.
each is often maintained in a subsidiary factory overhead ledger. This ledger is controlled by the Factory Overhead account in the general ledger. Factory Overhead is a temporary account that accumulates costs until they are allocated to jobs.Recording OverheadRecall that overhead costs are recorded with debits to the Factory Overhead account and with credits to other accounts such as Cash, Accounts Payable, and Accumulated Depreciation—Equipment. In the subsidiary factory overhead ledger, the debits are posted to their respective accounts such as Depreciation Expense—Equipment, InsuranceExpense—Warehouse, or Amortization Expense—Patents.To illustrate the recording of overhead, the following two entries reflect the depreciation of factory equipment and the accrual of utilities, respectively, for the week ended March 6.The above “overhead cost flows” shows that overhead costs flow from the Factory Overhead account to job cost sheets. Because overhead is made up of costs not directly associated with specific jobs or job lots, we cannot determine the dollar amount incurred on a specific job. We know, however, that overhead costs represent a necessary part of
business activities. If a job cost is to include all costs needed to complete the job, some amount of overhead must be included. Given the difficulty in determining the overhead amount for a specific job, however, we allocate overhead to individual jobs in some reasonable manner.Overhead Allocation BasesWe generally allocate overhead by linking it to another factor used in production, such as direct labor or machine hours. The factor to which overhead costs are linked is known as the allocation base.A manager must think carefully about how many and which allocation bases to use. This managerial decision influences the accuracy with which overhead costs are allocated to individual jobs. In turn, the cost of individual jobs might impact a manager's decisions for pricing or performance evaluation. In Exhibit 15.2, overhead is expressed as 160% of direct labor. We then allocate overhead by multiplying 160% by the estimated amount of direct labor on the jobs.Point:The predetermined overhead rate is computed at the start of the period and is used throughout the period to allocate overhead to jobs.Overhead Allocation RatesPoint:Predetermined overhead rates can be estimated using mathematical equations, statistical analysis, or professional experience.We cannot wait until the end of a period to allocate overhead to jobs because perpetual inventory records are part of the job order costing system (demanding up-to-date costs). Instead, we must predict overhead in advance and assign it to jobs so that a job's total costs can be estimated prior to its completion. This estimated cost is useful for managers in many decisions including setting prices and identifying costs that are out of control.