Overview managerial accounting chapter 03

Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the peri

LO2 Identify the documents used in a job-order costing system

LO3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process

LO4 Prepare journal entries to record costs in a job-order costing system

LO5 Apply overhead cost to Work In Process using a predetermined overhead rate

LO6 Use T-accounts to show the flow of costs in a job-order costing system, and prepare schedules of cost of goods manufactured and cost of goods sold

LO7 Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts

LO8 (Appendix 3A) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period

New in this Edition

• New In Business boxes have been added

• New shorter exercises that cover a single learning objective have been created

Chapter Overview

A Costing Systems (Exercise 3-1.) Two major types of costing systems are used in

manufacturing and many service companies: process costing and job-order costing

1 Process Costing A process costing system is used where a single, homogeneous product

or service is produced In a process costing system, total manufacturing costs are divided

by total number of units produced during a given period The unit cost that results is a broad, average figure Process costing is used in industries such as cement, flour, brick, and oil refining

2 Job-Order Costing Job-order costing is used when different types of products, jobs, or

batches are produced within a period In a job-order costing system, direct materials costs and direct labor costs are usually traced directly to jobs Overhead is applied to jobs using a predetermined rate Actual overhead costs are not traced to jobs Examples of industries in which job-order costing is used include special order printing, shipbuilding, construction, hospitals, professional services such as law firms, and movie studios

Note that in some situations either job-order costing or process costing could be used, depending on the level of detail needed and the desires of management

B Job-Order Costing—An Overview (Exercises 3-2, 3-3, 3-9, 3-11, 3-12, 3-13, 3-15,

and 3-16.) The discussion in the text and below assumes that a paper-based manual system is used for recording costs Cost and other data are recorded on materials requisition forms, time tickets, and job cost sheets Of course, many companies now enter cost and other data directly into computer databases and have dispensed with these paper documents Nevertheless, the data residing in the computer typically consists of a “virtual” version of the manual system Since a manual system is easy for students to understand, we continue to rely on it when describing a job-order costing system

1 Job Cost Sheet Each job has its own job cost sheet on which costs are charged to the job

The job cost sheet will have some code or descriptive data to identify the particular job and will contain spaces to record costs of materials, labor, and overhead Exhibit 3-4 provides

an illustration of a job cost sheet

2 Materials Costs When a job is started, materials that will be required to complete the job

are withdrawn from the storeroom The document that authorizes these withdrawals and

that specifies the types and amounts of materials withdrawn is called the materials requisition form The materials requisition form identifies the job to which the materials

are to be charged Care must be taken when charging materials to distinguish between direct and indirect materials An example of a materials requisition form is shown in Exhibit 3-1 in the text

3 Labor Labor costs are recorded on a document called a time ticket or a time sheet Each

employee records the amount of time he or she spends on each job and each task on a time ticket The time spent on a particular job is considered direct labor and its cost is traced to that job The cost of time spent on other tasks, not traceable to any particular job, is usually considered part of manufacturing overhead An example of an employee time ticket is shown in Exhibit 3-3 in the text

4 Manufacturing Overhead Manufacturing overhead includes all manufacturing costs that

are not traced to a particular job In practice, manufacturing overhead usually consists of all manufacturing costs other than direct materials and direct labor Since manufacturing overhead costs are not traced to jobs, they must be allocated to jobs if absorption costing is used

a We do not dwell on the reasons for allocating all manufacturing overhead to jobs in this chapter What costs should or should not be allocated to jobs and to products remains a controversial issue In the chapter we confine discussion to absorption costing since that is the approach that is used in the vast majority of organizations for both external and internal reporting

b In order to allocate overhead costs, management must choose an allocation base The most widely used allocation bases are direct labor-hours, direct labor costs, and machine-hours (These bases have been severely criticized in recent years Critics charge that overhead is largely unrelated to, or even negatively correlated with, machine-hours or direct labor-hours.) In the costing system illustrated in the chapter, a predetermined overhead rate is computed by dividing the estimated total overhead for

c Ideally overhead cost should be strictly proportional to the allocation base; in other words, an x% change in the allocation base should cause an x% change in the overhead cost Only then will the allocated overhead costs be useful in decision-making and in performance evaluation However, much of the overhead typically consists of costs that are not proportional to any conceivable allocation base and hence any scheme for allocating such costs will inevitably lead to costs that are biased and unreliable for decision-making and performance evaluation In practice, the overriding concern is to

select some basis or bases for allocating all overhead costs and scant attention is paid to

questions of causality These issues are not raised in the text at this point since students will not be ready to understand them until after having studied cost behavior in more depth in later chapters

d At any rate, the actual amount of the allocation base incurred by a job is recorded on the job cost sheet The actual amount of the allocation base is then multiplied by the

predetermined overhead rate to determine the amount of overhead that is applied to the

job

C Job Order Costing—The Flow of Costs (Exercises 3-4, 3-10, 3-13, 3-14, 3-15, and

3-17.) Exhibit 3-14 in the text provides a model for the cost flows in a job-order costing system

1 Overview of Cost Flows The basic flow of costs in a job-order system begins by

recording the costs of material, labor, and manufacturing overhead

a Direct material and direct labor costs are debited to the Work In Process account Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period Manufacturing overhead is applied to Work In Process using the predetermined rate The offsetting credit entry is to the Manufacturing Overhead control account

b The cost of finished units is credited to Work In Process and debited to the Finished Goods inventory account

c When units are sold, their costs are credited to Finished Goods and debited to Cost of Good Sold

2 The Manufacturing Overhead Control Account Manufacturing Overhead is a

temporary control account

a As stated above, actual overhead costs are recorded on the debit side of the Manufacturing Overhead control account Overhead costs applied to Work in Process using predetermined rates are recorded on the credit side of the account

b Any discrepancy between overhead costs incurred and overhead costs applied shows up

as a balance in the Manufacturing Overhead control account at the end of the period A debit balance is called underapplied overhead and a credit balance is called overapplied overhead

D Under- and Overapplied Overhead (Exercises 6, 7, 8, 13, 14, 16 and

3-of overhead cost incurred will almost always differ from the amount 3-of overhead cost that is applied to the Work In Process account The difference is termed underapplied or overapplied overhead, and as discussed above, can be determined by the ending balance in the Manufacturing Overhead control account An underapplied balance occurs when more overhead cost is actually incurred than is applied to the Work In Process account An overapplied balance results from applying more overhead to Work In Process than is actually incurred

1 Cause of Under- and Overapplied Overhead When a predetermined overhead rate is

used, it is implicitly assumed that the overhead cost is variable with (i.e., proportional to) the allocation base For example, if the predetermined overhead rate is $20 per direct labor- hour, it is implicitly assumed that the actual overhead costs will increase by $20 for each additional direct labor-hour that is incurred If, however, some of the overhead is fixed with respect to the allocation base, this will not happen and there will be a discrepancy between the actual total amount of the overhead and the overhead that is applied using the $20 rate

In addition, the actual total overhead can differ from the estimated total overhead because

of poor controls over overhead spending or because of inability to accurately forecast overhead costs

2 Disposition of Under- and Overapplied Overhead Two approaches to dealing with an

under- or overapplied overhead balance in the accounts are illustrated in the text

a The simplest approach is to close out the under- or overapplied overhead to Cost of Goods Sold This is the method that is used in most of the exercises and problems because it is easiest for students to understand and master

b The second approach is to allocate the under- or overapplied balance to Cost of Goods Sold and to the Work In Process and Finished Goods inventory accounts The basis of allocation is the amount of overhead applied during the period in the ending balance of each of these accounts This method is equivalent to waiting until the end of the period

to allocate the actual overhead costs based on the actual amount of the allocation base incurred

3 The Effect of Under- and Overapplied Overhead on Net Operating Income

a If overhead is underapplied, less overhead has been applied to inventory than has actually been incurred Enough overhead must be added to Cost of Goods Sold (and perhaps ending inventories) to eliminate this discrepancy Since Cost of Goods Sold is increased, underapplied overhead reduces net income

b If overhead is overapplied, more overhead has been applied to inventory than has actually been incurred Enough overhead must be removed from Cost of Goods Sold (and perhaps ending inventories) to eliminate this discrepancy Since Cost of Goods Sold is decreased, overapplied overhead increases net operating income

E The Predetermined Overhead Rate and the Level of Activity (Appendix 3A)

(Exercise 3-16.) Interest has been recently rekindled in the issue of how to select the denominator level of activity in the predetermined overhead rate In the main body of the chapter, it is assumed that the denominator is the estimated total amount of the allocation base for the period While this is the most common method used in practice, it has some serious drawbacks

1 Drawbacks of basing the predetermined overhead rate on the estimated level of activity

a If overhead contains substantial fixed costs, then as the estimated level of activity decreases, the predetermined overhead rate will increase Thus if the company starts losing sales due to a recession or other reason, the company’s unit costs will increase This could result in some managers increasing prices or dropping products, which is likely to be exactly the wrong thing to do in this situation

b Products are charged with resources they don’t use If a product uses 10% of the capacity of a fixed resource, it is argued that it should be charged with only 10% of the cost of that resource If all of the products a company makes use only 50% of the capacity of the fixed resource, the cost of that idle capacity should be separately recognized as a period expense rather than spread over the products that use the resource during the period Under the conventional approach, products are charged for both their share of the capacity they use and for a share of the idle capacity they do not use So if a product uses 10% of the capacity of a resource, but 50% of the capacity is idle, then under the conventional approach the product would be charged with 20% of the total cost of the resource

2 Suggested solution It has been suggested that predetermined overhead rates should be

based on the amount of the allocation base at capacity rather than on the estimated amount

of the allocation base for the upcoming period This proposal would result in stable unit costs that do not rise and fall with decreases and increases in the expected level of activity The underapplied overhead that results from the discrepancy between the actual level of activity and the level of activity at capacity can be treated as a period expense and taken directly to the income statement In the text we suggest the title “Cost of Unused Capacity” for this income statement item, but other names would work as well By showing this amount separately, the cost of idle capacity is highlighted for management attention For a good discussion of these issues, we recommend the IMA’s Statement on Management

Accounting 4Y, Measuring the Cost of Capacity, March 31, 1996 Even though we have a

great deal of sympathy with this proposal, we continue to use the conventional approach in the main body of the text since it still predominates in practice

Assignment Materials

Assignment Topic

Level of Difficulty

Suggested Time

Exercise 3-1 Process costing and job-order costing Basic 10 min Exercise 3-2 Job-order costing documents Basic 15 min Exercise 3-3 Compute the predetermined overhead rate Basic 10 min Exercise 3-4 Prepare journal entries Basic 15 min Exercise 3-5 Apply overhead Basic 10 min Exercise 3-6 Applying overhead; cost of goods manufactured Basic 15 min Exercise 3-7 Prepare T-accounts Basic 20 min Exercise 3-8 Under- and overapplied overhead Basic 10 min Exercise 3-9 Departmental overhead rates Basic 15 min Exercise 3-10 Journal entries and T-accounts Basic 30 min Exercise 3-11 Applying overhead in a service company Basic 30 min Exercise 3-12 Varying predetermined overhead rates Basic 30 min Exercise 3-13 Applying overhead; T-accounts; journal entries Basic 30 min Exercise 3-14 Applying overhead; journal entries; disposition of under-

or overapplied overhead Basic 15 min Exercise 3-15 Applying overhead; journal entries; T-accounts Basic 30 min Exercise 3-16 (Appendix 3A) Overhead rates and capacity issues Basic 30 min Exercise 3-17 Applying overhead in a service company; journal entries Basic 30 min Problem 3-18 Comprehensive problem Basic 45 min Problem 3-19 Cost flows; T-accounts; income statements Basic 60 min Problem 3-20 Journal entries, T-accounts; cost flows Basic 60 min Problem 3-21 T-accounts; applying overhead Basic 60 min Problem 3-22 T-accounts; overhead rates; journal entries Medium 60 min Problem 3-23 Multiple departments; applying overhead Medium 30 min Problem 3-24 T-account analysis of cost flows Medium 45 min Problem 3-25 Journal entries; T-accounts; disposition of under- or

overapplied overhead; income statement Medium 90 min Problem 3-26 Predetermined overhead rate; disposition of under- or

overapplied overhead Medium 30 min Problem 3-27 Schedule of cost of goods manufactured; overhead

analysis Medium 60 min Problem 3-28 (Appendix 3A) Predetermined overhead rate and capacity Medium 60 min Problem 3-29 Multiple departments; overhead rates; under- or

overapplied overhead Medium 30 min Problem 3-30 Plantwide versus departmental overhead rates; under- or

overapplied overhead Difficult 60 min Problem 3-31 Comprehensive problem; journal entries; T-accounts;

financial statements Difficult 120 min Problem 3-32 Comprehensive problem; T-accounts; job-order cost

flows; financial statements Difficult 120 min Case 3-33 Critical thinking; interpretation of manufacturing

overhead rates Difficult 45 min Case 3-34 (Appendix 3A) Ethics; predetermined overhead rate and

capacity Difficult 120 min Case 3-35 Ethics and the manager Difficult 45 min

Essential Problems: Problem 3-18 or 3-20, Problem 3-19 or 3-21, Problem 3-22, Problem 3-23

or 3-29

Supplementary Problems: Problem 3-24, Problem 3-25, Problem 3-26, Problem 3-27, Problem 3-30, Problem 3-31 or 3-32, Case 3-33, Case 3-35

Appendix 3A Essential Problems: Problem 3-28

Appendix 3A Supplementary Problems: Case 30-34

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Chapter 3 Lecture Notes

Helpful Hint: Before beginning the lecture, show students the third segment from the first tape of the McGraw-Hill/Irwin Managerial/Cost Accounting video library This segment introduces students to many of the concepts discussed in chapter 3 The lecture notes

reinforce the concepts introduced in the video

Chapter theme: Managers need to assign costs to products

to facilitate external financial reporting and internal

decision making This chapter illustrates an absorption

costing approach (also called a full cost approach) to

calculating product costs known as job-order costing

Helpful Hint: Briefly review the concepts of fixed and variable manufacturing costs to help students grasp the meaning of absorption costing Mention that total fixed costs are constant and therefore change on a per unit basis Variable costs are proportional to the number of units produced and are constant on a per unit basis

I Process and job-order costing: Two costing systems are

commonly used in manufacturing and many service

companies; these two systems are known as process

costing and job-order costing

A Process costing systems

i This type of cost system is used when:

1 A company produces many units of a single

product

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2 One unit of product is indistinguishable

from other units of product

3 The identical nature of each unit of product

enables assigning the same average cost per unit

ii Examples of companies that would use process costing include:

1 Weyerhaeuser (paper manufacturing)

2 Reynolds Aluminum (refining aluminum

ingots)

3 Coca-Cola (mixing and bottling beverages)

B Job-order costing systems

i This type of cost system is used when:

1 Many different products are produced

each period

2 Products are manufactured to order

3 The unique nature of each order requires

tracing or allocating costs to each job, and maintaining cost records for each job

ii Examples of companies that would use job-order costing include:

1 Boeing (aircraft manufacturing)

2 Bechtel International (large scale

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C Comparing process costing and job-order costing

i With job-order costing, many jobs are worked on

during the period; with process costing, a single product is produced for a long period of time

ii With job-order costing, costs are accumulated by

individual jobs; with process costing, costs are

accumulated by departments

iii With job-order costing, average unit costs are

computed by job; with process costing, average unit costs are computed for a particular operation

Quick Check − job-order vs process costing

II Job-order costing −an overview

A Types of manufacturing costs that are assigned to

products using a job-order costing system:

i Direct costs

1 Direct materials − Traced directly to each

job as the work is performed

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2 Direct labor − Traced directly to each job

as the work is performed

ii Indirect costs

1 Manufacturing overhead (including

indirect materials and indirect labor) − These costs are allocated to jobs rather than directly traced to each job

B The job cost sheet − The accounting department relies upon a job cost sheet for tracking the direct and

indirect costs associated with a given job

i An overview of a job cost sheet for a hypothetical company called PearCo:

1 A job number uniquely identifies each job

2 Direct material, direct labor and manufacturing overhead costs are accumulated for each job

3 The job cost sheet is a subsidiary ledger to

the Work in Process account

ii Measuring direct materials cost

1 Once a sales order has been received and a production order issued, the Production

Department prepares a materials

requisition form to specify the type,

quantity, and total cost of materials (e.g.,

$116) to be drawn from the storeroom, and the job number (e.g., A-143) to which the cost of the materials is to be charged

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a For an existing product, the production department can refer to a

bill of materials to determine the

type and quantity of each item of materials needed to complete a unit

of product

2 The Accounting Department records the total direct material cost (e.g., $116) on the appropriate job cost sheet Notice, the

material requisition number (e.g.,

X7-6890) is included on the job cost sheet to provide easy access to the source document

iii Measuring direct labor costs

1 Workers use time tickets to record the

amount of time that they spent on each job and the total cost assigned to each job

2 The Accounting Department records the labor costs from the time tickets (e.g., $88)

on to the job cost sheet

“In Business Insights”

The direct labor cost as a percent of a product’s total cost is often very small For example:

“Relation of Direct Labor to Product Cost” (Page 92)

• The National Labor Committee based in New

York estimates that the labor cost to assemble a

$90 pair of Nike sneakers is only $1.20

Consequently, many companies have stopped tracking direct labor costs separately For example:

“A More Productive Use of Time” (Page 92)

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• United Electric Controls, Inc., located in

Waterton, Massachusetts, converted all direct laborers to salaried workers and stopped producing labor reports

• The manufacturing vice president decided that he

wanted employees spending their time making products rather than filling out labor time tickets

“In Business Insights”

While many companies have stopped tracking direct labor costs separately, others now rely upon computer systems to assign direct labor costs to jobs For

example:

“Cleaning Up with Bar Codes” (page 93)

• Bradford Soap Works is a manufacturer of private

label bar soap

• Employees wear identification badges with a bar

code that reveals their relevant personal data

• The bar codes are used to charge workers’ time

directly to specific orders

• The bar codes have decreased clerical errors

from 500 errors per 10,000 transactions to just one error per 10,000 transactions

iv Manufacturing overhead application:

1 An allocation base, such as direct labor hours, direct labor dollars, or machine hours,

is used to assign manufacturing overhead to products Allocation bases are used

because:

i It is impossible or difficult to trace these

costs to particular jobs (i.e.,

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manufacturing overhead is an indirect cost)

a Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary

b Many types of manufacturing overhead costs are fixed even though output may fluctuate during the year

2 The predetermined overhead rate is

calculated by dividing the estimated amount

of manufacturing overhead for the coming period by the estimated quantity of the allocation base for the coming period

Ideally, the allocation base chosen should be

the cost driver of overhead cost

a Predetermined overhead rates that rely upon estimated data are often used because:

i Actual overhead costs for the period are not known until the end of the period, thus

inhibiting the ability to estimate job costs during the period

ii Actual overhead costs can fluctuate seasonally, thus misleading decision makers iii It simplifies record keeping

3 Manufacturing overhead is applied to jobs

using the predetermined overhead rate multiplied by the actual amount of the allocation base used completing the job (this

is called a normal costing system) For

example, assume PearCo:

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a Applies overhead to jobs based on direct labor hours

b Estimated its total overhead for the

year to be $640,000

c Estimated its total direct labor hours

for the year to be 160,000

d Calculated its predetermined

overhead rate to be $4 per direct

labor hour

i The amount of overhead that would be applied to the job cost sheet that we have been

working with related to Job

3 8 direct labor hours × $4 per hour = $32

v Completing the job cost sheet

1 The total direct material, direct labor, and manufacturing overhead costs assigned to

Job A-143 is $236 Since this particular job included two units of production, the

average cost per unit is $118

a The average unit cost should not be

interpreted as the costs that would actually be incurred if another unit were produced

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b The fixed overhead would not

change if another unit were produced,

so the incremental cost of another unit

is something less than $118

C Job-order costing: document flow summary

i A sales order is prepared as a basis for issuing a

production order

ii A production order initiates work on a job

iii A materials requisition is used to draw direct and

indirect materials from the storeroom

1 Direct material costs are charged to specific jobs

2 Indirect material costs are included in manufacturing overhead

iv Employee time tickets are used to quantify direct

and indirect labor costs

1 Direct labor costs are charged to specific jobs

2 Indirect labor costs are included in manufacturing overhead

v The predetermined overhead rate is used to apply

manufacturing overhead costs to jobs

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III Job-order costing −the flow of costs

Helpful Hint: Sometimes students need a brief review of journal entries and the use of T-accounts before

beginning this section of the chapter

A The transactions (in T-account and journal entry form) that capture the flow of costs in a job-order costing system are as follows:

i The purchase and issue of raw materials

1 In T-account form:

a The cost of raw material purchases is debited, and although not shown, the credit side of the transaction would

be to Accounts Payable

b The cost of direct material requisitions is debited to Work in Process and added to the job cost sheets which serve as a subsidiary ledger

c The cost of indirect material requisitions is debited to Manufacturing Overhead

2 In journal entry form:

a Debit Raw Materials and credit Accounts Payable

b Debit Work in Process and Manufacturing Overhead and credit Raw Materials

ii The recording of labor costs

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a Direct labor costs are debited to Work in Process and added to the job cost sheets which serve as a

subsidiary ledger

b Indirect labor costs are debited to Manufacturing Overhead

2 In journal entry form:

a Debit Work in Process and Manufacturing Overhead and credit Salaries and Wages Payable

iii Recording actual manufacturing overhead costs

(other than indirect materials and indirect labor)

2 In journal entry form:

a Debit Manufacturing Overhead and credit various accounts as shown

iv Applying manufacturing overhead costs to work

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1 In T-account form:

a Work in process is debited and Manufacturing Overhead is credited

by the amount of the actual quantity

of the allocation base multiplied by

the predetermined rate

b Actual manufacturing overhead

costs are not debited to Work in

Process, nor are they charged to jobs via the job cost sheets

c The Manufacturing Overhead

account is a clearing account The

actual amount of overhead incurred during the period on the debit side of the account will almost certainly not equal the amount applied to Work in Process as shown on the credit side

of the account This requires a end adjusting entry that will be discussed shortly

year-2 In journal entry form:

a Debit Work in Process and Credit Manufacturing Overhead

Helpful Hint: Students sometimes have difficulty understanding the use of Manufacturing Overhead as a clearing account Explain that the purpose of the

clearing account is to find any discrepancy that exists between the amount of overhead applied to inventory and the amount of overhead actually incurred Actual overhead incurred is debited to the account Overhead applied to inventory using the predetermined rate is credited to the account

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v Accounting for nonmanufacturing costs

Helpful Hint: Review the concepts of product and period costs at this point Since period costs are not directly related to the actual manufacture of the products, they are expensed as incurred

1 Companies that use job-order cost systems

to assign manufacturing costs to products also incur nonmanufacturing costs

2 Nonmanufacturing costs should not go into

the Manufacturing Overhead account

3 Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in

the period incurred For example:

a The salary expenses of employees that work in a marketing, selling or administrative capacity are expensed

in the period incurred

b Advertising expenses are expensed in the period incurred

vi Transferring completed units from work in

process to finished goods

1 In T-account form:

a The sum of all amounts transferred from work in process to finished goods represents the cost of goods manufactured for the period

b The Work in Process account is credited and the Finished Goods account is debited

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2 In journal entry form:

a Debit Finished Goods and credit Work in Process

vii Transferring finished goods to cost of goods sold

c This journal entry is also accompanied by a journal entry that recognizes the sales revenue

2 In journal entry form:

a Debit Accounts Receivable and credit Sales

b Debit Cost of Goods Sold and credit Finished Goods

Helpful Hint: As a concluding thought, remind students that all inventory accounts are governed by the same logic: Beginning inventory + Additions = Ending Inventory + Transfers out In the case of raw materials, transfers out consist of both direct and indirect materials requisitions Direct materials requisitions are added to Work in Process inventory Indirect materials requisitions are debited to

Manufacturing Overhead Additions to Work in Process consist of direct materials requisitions, direct

labor, and overhead applied Transfers out of Work in

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Process consist of costs transferred to Finished Goods Transfers out of Finished Goods consist of Cost of

Goods Sold

IV Problems of overhead application

A There are two complications relating to overhead

a Underapplied overhead exists when

the amount of overhead applied to jobs during the period using the

predetermined overhead rate is less

than the total amount of overhead

actually incurred during the period

b Overapplied overhead exists when

the amount of overhead applied to jobs during the period using the predetermined overhead rate is

greater than the total amount of

overhead actually incurred during the period

Helpful Hint: Students need to understand that factory overhead must be estimated at the beginning of the production period Therefore, there will most likely be

a difference between actual and applied overhead A

debit balance in the Manufacturing Overhead account

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