Cost Pool
A grouping of individual indirect cost items
Cost Allocation Base
A basis of systematically linking indirect cost to a cost object
Normal Costing (Timely)
-Direct costs are traced to a particular job
> Direct materials and direct labor
-Indirect costs or overhead are allocated based on a predetermined or budgeted overhead rate
> Factory rent, utilities, supervisor salary, etc.
Normal Costing (con.)
-Indirect cost or overhead is estimated for the period (budgeted overhead)
-An appropriate cost driver is selected (what causes overhead to go up or down, i.e. allocation base)
>Usually labor hours, machine hours, or direct materials
Budgeted Manufacturing Overhead Rate
Budgeted Manufacturing Overhead Costs / Budgeted Total Quantity of Cost-Allocation Base
Actual Costing (Accurate)
-Essentially the same as normal costing
-Except when you calculate overhead allocation you:
> Use the actual overhead costs
> Use the actual allocation base
Actual Manufacturing Overhead Rate
Actual Manufacturing Overhead Costs / Actual Total Quantity of Cost-Allocation Base
Under-Applied Overhead
-Applied < Actual
> Overhead costs were higher than expected
> The allocation base was lower than expected
Over-Applied Overhead
-Applied > Actual
> Overhead costs were lower than expected
> The allocation base was higher than expected
Write-off to COGS
-If the difference is small, simply write off to cost of goods sold
> If under-applied, debt COGS
> If over-applied, credit COGS
Journal Entries
-Purpose is to have the accounting system closely reflect the actual state of the business, its inventories, and its production processes
-Made at each step of the production process (buying DM, completing WIP)
-Adjusting journal entries at the end of the reporting period (Under/over allocated indirect costs)
JE 1 - Purchase of RM on credit
Raw materials 100
Accounts payable 100
JE 2 - Requisition of direct and indirect RM into production
Work-in-Process 40
Manufacturing Overhead 10
Raw Materials 50
JE 3 - Incurred direct and indirect (OH) labor wages
Work-in-Process 80
Manufacturing Overhead 20
Accounts Payable or Cash 100
JE 4 - Incurring or recording of various actual indirect costs
Manufacturing Overhead 200
Salaries Payable 50
Accounts Payable 40
Accumulated Depreciation 80
Prepaid Expenses 30
JE 5 - Allocation of Overhead Costs
Work-in-Process 240
Manufacturing Overhead 240
