FOH - 2 Factory overheads
Transcript of FOH - 2 Factory overheads
-
8/21/2019 FOH - 2 Factory overheads
1/21
Management Accounting Fundamentals
By: Naveed Ahmad Mughal
Accountingfor FOH
-
8/21/2019 FOH - 2 Factory overheads
2/21
Activity Based Costing (ABC)
ABC measures a variety of different factory
activities and their relationship to overhead cost
Used in companies where overhead rate cannot be
ascertained on the commonly used bases Designed to take into account all the different cost
and distribute them as accurately as possible to the
products
This approach is best when the company hassignificant nonvolume-related costs in its plant which
are not caused by traditional cost drivers such as
labor hours and machine hours.
-
8/21/2019 FOH - 2 Factory overheads
3/21
Activity Based Costing (contd)
ABC Steps
Identify activities
Group activities into activity centers
Collect costs associated with activity centersinto cost pools
Cost pools are usually organized bycategories
Examples: Unit-level, Batch-level, Product-level,and Factory level activities
Identify a cost driver for each category
-
8/21/2019 FOH - 2 Factory overheads
4/21
Applying Manufacturing Overhead
Allocation of manufacturing overhead is
conducted in two steps:
Estimated overhead costs are computed by
departments and recorded on job cost sheets
Total overhead accumulated is charged to
production by posting it to the Work in
Process account in the general ledger
-
8/21/2019 FOH - 2 Factory overheads
5/21
Entries in the General Ledger
At the end of the month entries are made in the
general ledger
Posting to departmental manufacturing
overhead accounts A credit balance represents over-applied overhead
A debit balance represents under-applied overhead
-
8/21/2019 FOH - 2 Factory overheads
6/21
Accounting for Actual and
Applied Factory Overhead
Entry to apply estimated factory overhead to
production
Work in Process XXApplied Factory Overhead XX
At the end of the period, the applied factory overheadaccount is closed to factory overhead.
Applied Factory Overhead XX
Factory Overhead Control XX
-
8/21/2019 FOH - 2 Factory overheads
7/21
Flow of Entries to Record Applied
Overhead Costs
-
8/21/2019 FOH - 2 Factory overheads
8/21
Overapplied or Underapplied
Overhead Monthly procedure
Balance of the manufacturing overhead
account are closed at the end of each month
in the general ledger
It represents the cumulative overapplied or
underapplied overhead to date
-
8/21/2019 FOH - 2 Factory overheads
9/21
Overapplied or Underapplied
Overhead (contd) End-of-year procedures
Both overapplied and underapplied overhead
must be closed
As it is difficult to allocate these costs into
various manufacturing stagescosts are
allocated to Cost of Goods Sold only
-
8/21/2019 FOH - 2 Factory overheads
10/21
Overapplied or Underapplied
Overhead (contd) Examples of closing entries
Overapplied costs:
Overapplied Manufacturing Overhead dr.
Cost of Goods Sold cr. Underapplied costs
Cost of Goods Sold dr.
Underapplied Manufacturing Overhead cr.
-
8/21/2019 FOH - 2 Factory overheads
11/21
Control of Manufacturing
Overhead Costs The method used to record manufacturing
overhead cost depends on:
Size of the company
How it is organized
Types of products manufactured
Account in use: Manufacturing Overhead
Control account in the general ledger
-
8/21/2019 FOH - 2 Factory overheads
12/21
Departmentalization of
Overhead Separate control accounts
Maintain a control account for each different
manufacturing overhead cost
Single control accounts
Subsidiary ledger by type of cost
Subsidiary ledger by department
-
8/21/2019 FOH - 2 Factory overheads
13/21
Recording Overhead Costs
Voucher register entries
Invoice comparison with purchase order
Preparation of voucher including a notation of
department to be charged Distribution memorandum indicates how the cost is
to be distributed
Enter into voucher register upon approval
Charge the cost to the appropriatedepartmental overhead analysis sheet
-
8/21/2019 FOH - 2 Factory overheads
14/21
Recording Overhead Costs
(contd) General journal vouchers
Most manufacturing overhead costs include
fixed costs
Involves the preparation of a schedule of
monthly fixed overhead costs
The schedule is attached to the journal voucher
and posted to departmental overhead analysis
sheet.
-
8/21/2019 FOH - 2 Factory overheads
15/21
Summary Schedule of
Departmental Costs Schedule shows the total amount of each
type of cost incurred in each department
Prepared at the end of each month
Subsidiary ledger should agree with its related
control account
-
8/21/2019 FOH - 2 Factory overheads
16/21
Allocating Overhead to Jobs
Overhead cost must be associated with
products or jobs
This ensures that the transfer will parallel the
work flow
First stepdistributing overhead costs to
departments
-
8/21/2019 FOH - 2 Factory overheads
17/21
Recording Overhead
Distribution in the General
Ledger At the end of the month the distribution of
overhead costs is entered in the general
ledger
Manufacturing overhead control is closed into
separate departmental overhead accounts
Distribution of service department costs arejournalized in the order of allocation
Fl f E t i t R d Di t ib ti f
-
8/21/2019 FOH - 2 Factory overheads
18/21
Flow of Entries to Record Distribution of
Overhead Costs
-
8/21/2019 FOH - 2 Factory overheads
19/21
Distributing Service Department
Factory Overhead Costs Service departments are an essential part of the
organization, but they do not work directly on theproduct.
Production departments perform the actual
manufacturing operations that physically changethe units being processed.
The costs of the service departments must beapportioned to the production departments.
An analysis of the service departmentsrelationship to other departments is necessary.
Costs should be distributed in proportion toservices provided
-
8/21/2019 FOH - 2 Factory overheads
20/21
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
-
8/21/2019 FOH - 2 Factory overheads
21/21
Methods of Distributing Costs
1. Direct Distribution Method Service department costs are allocated only to
production departments.
2. Sequential Distribution or Step-Down Method
Distributes service department costs regressively toother service departments and then to productiondepartments.
3. Algebraic Distribution Method Distributes costs by simultaneous equations
recognizing the relationship of services rendered byservice departments to each other.