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Questions and Answers
What does the adjusted allocation rate approach aim to represent in the accounting records?
What does the adjusted allocation rate approach aim to represent in the accounting records?
In the context of underallocated overhead, how is the adjusted amount for the MOH allocated to a job calculated?
In the context of underallocated overhead, how is the adjusted amount for the MOH allocated to a job calculated?
What approach is used to spread the difference between underallocated or overallocated overhead among various accounts?
What approach is used to spread the difference between underallocated or overallocated overhead among various accounts?
Based on the provided data, what would be the new balance for Work in Process after prorating the overhead?
Based on the provided data, what would be the new balance for Work in Process after prorating the overhead?
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What percentage of the total balance does Cost of Goods Sold account for in the overall allocation?
What percentage of the total balance does Cost of Goods Sold account for in the overall allocation?
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What could cause the difference between actual overhead costs and budgeted overhead costs?
What could cause the difference between actual overhead costs and budgeted overhead costs?
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Which method involves recalculating all allocations using the actual allocation rate?
Which method involves recalculating all allocations using the actual allocation rate?
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What entry should be made when overhead control is less than overhead allocated under the write-off approach?
What entry should be made when overhead control is less than overhead allocated under the write-off approach?
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In the case of overallocated overhead, which account would be credited?
In the case of overallocated overhead, which account would be credited?
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Which approach allocates the difference between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their sizes?
Which approach allocates the difference between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their sizes?
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Study Notes
Overhead Cost Variance
- Overhead cost variance occurs when the actual overhead cost differs from the budgeted overhead cost.
- Numerator Reason for Variance: The actual indirect cost pool may vary from the budgeted indirect cost pool.
- Denominator Reason for Variance: The actual quantity of the allocation base used may differ from the budgeted quantity.
Adjusting Over/Underallocated Overhead
- Write-Off Approach: Simply adjusts the difference between actual overhead cost and allocated overhead cost to Cost of Goods Sold.
- Adjusted Allocation Rate Approach: All allocations are recalculated using the actual allocation rate.
- Proration Approach: The difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their ending balances.
Write-Off Approach
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Underallocated Overhead: Actual overhead exceeds allocated overhead.
- Journal Entry: Debit Cost of Goods Sold with the difference, debit Manufacturing Overhead Allocated, and credit Manufacturing Overhead Control.
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Overallocated Overhead: Allocated overhead exceeds actual overhead.
- Journal Entry: Debit Manufacturing Overhead Allocated, credit Manufacturing Overhead Control, and credit Cost of Goods Sold with the difference.
Adjusted Allocation Rate Approach
- Underallocated Overhead: Increases the manufacturing overhead allocated to each job by a percentage: [(MOH control - MOH allocated) / MOH allocated] x 100
- Overallocated Overhead: Decreases the manufacturing overhead allocated to each job.
Proration Approach
- The difference (underallocated or overallocated) is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their ending balances.
- Example:
- Work in Process: 50,000 / 2,500,000 = 2%, allocate 2% of the difference.
- Finished Goods: 75,000 / 2,500,000 = 3%, allocate 3% of the difference.
- Cost of Goods Sold: 2,375,000 / 2,500,000 = 95%, allocate 95% of the difference.
- Journal Entry for Underallocated Overhead: Debit Work in Process, Finished Goods, and Cost of Goods Sold, and credit Manufacturing Overhead Control.
- Journal Entry for Overallocated Overhead: Credit Work in Process, Finished Goods, and Cost of Goods Sold, and debit Manufacturing Overhead Control.
Journal Entries for Manufacturing Overhead
- Purchase of materials on credit: Debit Materials Control, credit Accounts Payable.
- Requisition of materials: Debit Work in Process for direct materials, debit Manufacturing Overhead for indirect materials, and credit Materials Control.
- Labor wages incurred: Debit Work in Process for direct labor, debit Manufacturing Overhead for indirect labor, and credit Cash.
- Actual Indirect Costs: Debit Manufacturing Overhead, and credit appropriate accounts (Salaries Payable, Accounts Payable, Accumulated Depreciation, Prepaid Expenses).
- Allocation of overhead to Work in Process: Debit Work in Process, and credit Applied Manufacturing Overhead.
- Completion and transfer of jobs: Debit Finished Goods, and credit Work in Process.
Cost Allocation
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Seven Steps to Cost Allocation:
- A. Identify indirect costs: Determine all factory overhead costs.
- C. Select cost-allocation bases: Choose a reasonable method to allocate overhead, relevant to the activity.
- D. Compute the indirect cost rate: Calculate the predetermined overhead rate.
- B. Compute the total cost of the job: Add direct materials, direct labor, and allocated overhead.
Normal Costing
- Under normal costing, direct costs are traced using an actual rate, and indirect costs are allocated using a budgeted rate.
Materials Control
- The Materials Control account is increased (debited) when direct or indirect materials are purchased.
Work-in-Process
- The Work-in-Process Control account is increased (debited) for:
- Direct materials
- Direct manufacturing labor
- Allocated manufacturing overhead costs
Manufacturing Overhead Control
- When indirect materials are requisitioned, the Manufacturing Overhead Control account is increased (debited).
Journal Entries for Materials and Labor
- Direct and Indirect Materials to Manufacturing: Debit Work-in-Process for direct materials, debit Manufacturing Overhead for indirect materials, and credit Materials Control.
- Direct and Indirect Labor Costs: Debit Work in Process for direct labor, debit Manufacturing Overhead for indirect labor, and credit Cash.
- Cost Accumulation in Work-in-Process: All costs related to a job are accumulated in Work-in-Process Control, including direct materials, direct labor, and applied overhead.
- Cost Accumulation in Manufacturing Overhead: Actual indirect costs are accumulated in Manufacturing Overhead Control.
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Description
This quiz explores the concepts of overhead cost variance, including the reasons for variances in numerator and denominator. It also outlines different approaches for adjusting over or underallocated overhead, emphasizing the write-off method and its journal entries. Test your understanding of these key accounting principles.
