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Accounting For Factory Overheads: Lecture # 9

cost accounting

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Amna Nasser
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72 views17 pages

Accounting For Factory Overheads: Lecture # 9

cost accounting

Uploaded by

Amna Nasser
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Accounting For Factory

Overheads

Lecture # 9
ACCOUNTING FOR ACTUAL FACTORY OVERHEAD

 Cost accounting systems are designed to


accumulate, classify, and summarize the factory
overhead costs actually incurred.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
GATHERING INFORMATION OF ACTUAL FACTORY OVERHEADS

 The principal source documents for recording


overhead in the journal are:
 Purchase vouchers
 Materials requisitions
 Labor time tickets
 General journal voucher.
SCHEDULE OF FIXED COSTS

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
SUMMARY OF FACTORY OVERHEAD

Figure 4-9 Summary of Factory Overhead

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
DISTRIBUTING SERVICE DEPARTMENT EXPENSES

 Departments are divided into two classes: service


departments and production departments.
 A service department is an essential part of the
organization, but it does not work directly on the
product.
 A production department performs the actual
manufacturing operations that physically change
the units being processed.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
DISTRIBUTING SERVICE DEPARTMENT EXPENSES

 Direct Distribution Method


 Sequential Distribution or Step-Down Method
 Reciprocal Method

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
DIRECT DISTRIBUTION METHOD

Figure 4-10 Method 1-Spreadsheet for Direct Distribution of Service Department Costs to Production Departments

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
SEQUENTIAL DISTRIBUTION METHOD
Figure 4-11 Method 2-Spreadsheet for Sequential Distribution of Service Department Costs Based on Magnitude of Total
Costs in Service Departments

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
APPLYING FACTORY OVERHEAD TO PRODUCTION

 Predetermined factory overhead rates are


computed by dividing the budgeted factory
overhead cost by the budgeted production.
 The budgeted production may be expressed in
such terms as machine hours, direct labor hours,
direct labor cost, and units produced.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
APPLYING FACTORY OVERHEAD TO PRODUCTION

 Management should give a high priority to


attaining the most accurate predetermined factory
overhead rate.

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
APPLYING FACTORY OVERHEAD TO PRODUCTION

 Direct Labor Cost Method


 Direct Labor Hour Method
 Machine Hour Method
 Activity-based Costing Method

Principles of Cost Accounting, 17th Edition, Edward J. VanDerbeck, ©2015 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
FACTORS TO BE CONSIDERED IN SELECTION OF OVERHEAD
RATES

 Base to be used
 Physical output

Estimated factory overhead = factory overhead/unit


Estimated units of production

 Direct materials cost

Estimated factory overhead *100 = % of overhead/direct material cost


Estimated material cost
FACTORS TO BE CONSIDERED IN SELECTION OF OVERHEAD
RATES

 Direct labor cost

Estimated factory overhead *100 = % of overhead/direct labor cost


Estimated Direct labor cost
 Direct labor costs = Direct labor hours* hourly wage rate

 Direct labor hours


Estimated factory overhead = Rate per direct labor hour
Estimated Direct labor hours

 Machine hours
Estimated factory overhead = Rate per machine hour
Estimated machine hours
DETERMINING THE PREDETERMINED OVERHEAD RATE
EXAMPLE
 Normal capacity= 150,000 DLH
 Actual capacity= 116,000 hours
 Expected actual capacity= 120,000DLH
 Fixed expense= $120,000
 Variable expense= $0.50/ DLH
SOLUTION
Normal Capacity Expected Actual Capacity
Fixed expense 120,000 120,000
Variable expense:
150,000 hrs*0.50 75,000
120,000 hrs*0.50 60,000
______ ______
Total estimated overhead195,000 180,000
Estimated DLHs 150,000 120,000
Factory overhead/hr $1.30 $1.50
* 116,000 hrs * 116,000 hrs
Applied Overheads $150,800 $174,000

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