Overhead costs are the unsung heroes of manufacturing. They're the indirect expenses that keep the factory running but can't be traced to specific products. Understanding these costs is crucial for accurate pricing and profitability analysis in job order costing systems.
Calculating and applying overhead involves estimating costs, choosing allocation bases, and using predetermined rates. This process helps distribute overhead fairly across jobs, enabling better cost control and decision-making. It's a balancing act that can impact financial statements and overall business performance.
Understanding Overhead Costs and Application
Role of overhead costs
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Top images from around the web for Role of overhead costs
Flow of Costs (Job Order Costing) | Accounting for Managers View original
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2.1 Characteristics of Job Order Costing | Managerial Accounting View original
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2.3 Job Costing Process with Journal Entries | Managerial Accounting View original
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Flow of Costs (Job Order Costing) | Accounting for Managers View original
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2.1 Characteristics of Job Order Costing | Managerial Accounting View original
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Overhead costs encompass indirect manufacturing expenses not directly traceable to specific jobs or products (factory rent, utilities, equipment depreciation)
Crucial for accurate cost determination in job order costing systems allocating costs to individual jobs or products
Enable informed pricing decisions and profitability analysis by providing comprehensive cost picture
Calculation of predetermined overhead rates
formula: Estimated Total Overhead Costs÷Estimated Total Allocation Base
Common allocation bases include direct labor hours, direct labor cost, machine hours, or units produced
Process involves:
Estimating total overhead costs for the period
Selecting appropriate allocation base
Estimating total quantity of chosen allocation base
Dividing estimated overhead by estimated allocation base
Overhead Application and Analysis
Application of overhead to jobs
by multiplying actual quantity of allocation base used by predetermined rate
Applied overhead formula: Actual Quantity of Allocation Base×Predetermined Overhead Rate
Accounting entry: Debit Work in Process Inventory, Credit Manufacturing Overhead
Under-applied vs over-applied overhead
Under-applied overhead occurs when actual overhead exceeds applied overhead, increasing cost of goods sold
Over-applied overhead happens when applied overhead exceeds actual overhead, decreasing cost of goods sold
Calculated as: Actual Overhead−Applied Overhead
Disposition methods include prorating to Work in Process, Finished Goods, and Cost of Goods Sold or immediate write-off to Cost of Goods Sold
Impacts financial statements by affecting inventory values on Balance Sheet and influencing gross profit and net income on Income Statement