Job Costing and Overhead Allocation Flashcards
Describe how job order costing is used.
It is used to accumulate costs related to the production of often large, relatively expensive, heterogeneous (customs ordered) items.
Name the three types or “versions” of overhead involved in allocation.
- Estimated
- Actual
- Applied
When is the predetermined overhead rate (POR) established?
The POR is established prior to the beginning of the year.
What does the journal entry look like that actually allocates overhead?
Work-in-process is debited; Factory overhead applied is credited
Describe the accounting treatment of over-applied or under-applied overhead (e.g., the difference between actual overhead and overhead applied to production).
If immaterial, simply charge to Cost of Goods Sold (COGS); if material, prorate to Work-In-Process (WIP), Finished Goods (FG), and COGS
How is the predetermined overhead rate (POR) calculated?
The POR is based on an estimated overhead amount divided by an estimated allocation base amount.
Define “applied overhead”.
The estimated overhead charged to production: calculated by multiplying the overhead rate times the allocation base activity units (direct labor hours, machine hours, raw material weight, etc.).
When are overhead accounts closed?
Overhead accounts are closed at the end of every year.
When over/underapplied overhead is significant (i.e., large), how is the amount reconciled?
Prorated amounts of the overhead are allocated to WIP, FG, and CGS.
How is applied overhead calculated?
Applied overhead is calculated by multiplying the predetermined overhead rate by the actual number of finished goods units used in production (e.g., direct labor hours or machine hours).
Define “actual overhead”.
The amounts actually paid for indirect costs (utilities, maintenance, supervision, etc.).
How are overhead accounts closed?
If overhead is over applied, then “actual” overhead is debited and Cost of Goods Sold is credited for the amount over applied. Where under applied, the opposite entry is made.
What are the three steps in overhead allocation?
- Choose the predetermined overhead rate (POR)
- Allocate using the POR
- Adjust over/underapplied overhead to actual at the end of the year
How would one choose an overhead resource driver such as direct labor hours or machine hours?
Direct labor hours would make sense for a labor-intensive business with little automation.
Machine hours would make sense for a highly automated capital-intensive business.
