Managerial Accounting: Overhead Rate & Job Order Costing

Formula for calculating the Predetermined Overhead Rate

$$\text{Predetermined Overhead Rate} = \frac{\text{Estimated Total Manufacturing Overhead Cost}}{\text{Estimated Allocation Base (Cost Driver)}}$$

Formula for Applied Manufacturing Overhead

$$\text{Applied Overhead} = \text{Predetermined Overhead Rate} \times \text{Actual Activity Level}$$

Common mistake when calculating Applied Manufacturing Overhead

Multiplying the predetermined overhead rate by estimated activity instead of actual activity level.

Sides of the Manufacturing Overhead T-account for actual vs. applied costs

Actual overhead costs are debited on the left side, while applied overhead costs are credited on the right side.

Condition that creates Under-applied Overhead

Occurs when actual overhead exceeds applied overhead (left side of MOH T-account is greater than right side).

Condition that creates Over-applied Overhead

Occurs when applied overhead exceeds actual overhead (right side of MOH T-account is greater than left side).

Journal entry to close an immaterial under-applied overhead balance

Debit Cost of Goods Sold, Credit Manufacturing Overhead.

Journal entry to close an immaterial over-applied overhead balance

Debit Manufacturing Overhead, Credit Cost of Goods Sold.

Treatment of an immaterial overhead variance at period-end

Charge or credit the entire variance amount directly to Cost of Goods Sold.

Treatment of a material overhead variance at period-end

Allocate the variance across Work in Process, Finished Goods, and Cost of Goods Sold based on each account's balance percentage.

Journal entry for purchasing raw materials on account

Debit Raw Materials Inventory, Credit Accounts Payable.

Journal entry for requisitioning direct and indirect raw materials

Debit Work in Process Inventory (direct) and Debit Manufacturing Overhead (indirect), Credit Raw Materials Inventory.

Journal entry for recording factory labor incurred

Debit Factory Labor, Credit Payroll Liabilities (combining wages and employer taxes).

Journal entry for assigning factory labor via time tickets

Debit Work in Process Inventory (direct labor) and Debit Manufacturing Overhead (indirect labor), Credit Factory Labor.

Journal entry for actual manufacturing overhead incurred on account

Debit Manufacturing Overhead, Credit Accounts Payable.

Journal entry for applying overhead to production

Debit Work in Process Inventory, Credit Manufacturing Overhead.

Journal entry when manufactured goods are completed

Debit Finished Goods Inventory, Credit Work in Process Inventory.

Journal entry for recording the cost of manufactured goods sold

Debit Cost of Goods Sold, Credit Finished Goods Inventory.

Journal entry for recording sales revenue from goods sold on account

Debit Accounts Receivable, Credit Sales Revenue.

Service industry equivalent for Work in Process Inventory

Service Contracts in Process

Service industry equivalent for Manufacturing Overhead

Operating Overhead

Service industry equivalent for Finished Goods Inventory

Cost of Completed Service Contracts

Journal entry to apply overhead in a service firm

Debit Service Contracts in Process, Credit Operating Overhead.

Formula for Total Manufacturing Costs in the COGM schedule

$$\text{Total Manufacturing Costs} = \text{Direct Materials Used} + \text{Direct Labor} + \text{Applied Overhead}$$

Formula to derive Cost of Goods Manufactured from Total Manufacturing Costs

$$\text{Cost of Goods Manufactured} = \text{Total Manufacturing Costs} + \text{Beginning WIP Inventory} - \text{Ending WIP Inventory}$$

Recommended study method using the spiral binder

Use the spiral binder only to confirm answers after attempting problems independently, not while solving them.

Main risk of relying on study notes during the exam

Students run out of time searching for answers instead of recalling concepts efficiently.