Manufacturing overhead applied vs incurred

  • Creator
    Topic
  • #183490
    Anonymous
    Inactive

    How do you know when to use manufacturing overhead applied vs manufacturing overhead incurred? I have an example question for reference:

    Under Tall Co’s job order costing system manufacturing overhead is applied to work in process using predetermined annual overhead rate. During January 2013, Tall’s transactions included the following:

    DM issued to production 80,000

    IM issued to production 8,000

    Manufacturing OH incurred 105,000

    Manufacturing OH applied 103,000

    DL costs 107,000

    Tall had neither beginning nor ending WIP inventory. What is the cost of jobs completed in January 2013?

    A: 310,000

    B: 290,000

    C: 302,000

    D: 282,000

    B: This answer is correct. The requirement is to determine the cost of jobs completed in January 2013. In a job order costing system, manufacturing overhead cannot be traced to specific jobs. Instead, overhead is accumulated in an overhead control account and applied to work performed based on some predetermined overhead rate. The difference between actual and applied overhead is normally either allocated to work in process, finished goods, and cost of goods sold or written off to cost of goods sold. In this case the cost of jobs completed is being determined for January only. Under- or overapplied overhead is not usually considered on a monthly basis. Therefore, the cost of jobs completed should include allocated overhead only. The amount of indirect materials issued to production has already been included in overhead applied. These costs do not need to be considered again in determining the cost of jobs completed. The cost of jobs completed can be computed as follows:

    Direct materials issued to production $ 80,000

    Manufacturing overhead applied 103,000

    Direct labor costs 107,000

    Cost of jobs completed $ 290,000

Viewing 6 replies - 1 through 6 (of 6 total)
  • Author
    Replies
  • #509722
    infinity
    Member

    Manufacturing overhead incurred (also known as Actual Manufacturing overhead) examples would be electricity, rent, utilities, etc that are used in the manufacturing process.

    Manufacturing overhead applied is the overhead that is allocated to the product. This would be the cost incurred to the inventory.

    Hope this helps!

    BEC 74

    Never give up, never surrender.

    #509768
    infinity
    Member

    Manufacturing overhead incurred (also known as Actual Manufacturing overhead) examples would be electricity, rent, utilities, etc that are used in the manufacturing process.

    Manufacturing overhead applied is the overhead that is allocated to the product. This would be the cost incurred to the inventory.

    Hope this helps!

    BEC 74

    Never give up, never surrender.

    #509724
    M.O.D.
    Member

    The question tells you “manufacturing overhead is applied to work in process using predetermined annual overhead rate”.

    This is a “normal” costing or “standard” costing. The overhead rate is established at the beginning of the year, thus “predetermined.”

    If they had said “actual” then you apply the actual costs to inventory (not typical done because of seasonal variations in overhead costs, like heating).

    You should review this theory more thoroughly, because it is the most basic aspect of cost accounting.

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

    #509770
    M.O.D.
    Member

    The question tells you “manufacturing overhead is applied to work in process using predetermined annual overhead rate”.

    This is a “normal” costing or “standard” costing. The overhead rate is established at the beginning of the year, thus “predetermined.”

    If they had said “actual” then you apply the actual costs to inventory (not typical done because of seasonal variations in overhead costs, like heating).

    You should review this theory more thoroughly, because it is the most basic aspect of cost accounting.

    BA Mathematics, UC Berkeley
    Certificates in CPA and EA preparation, College of San Mateo
    CMA I 420, II 470
    FAR 91, AUD Feb 2015 (Gleim self-study)

    #509726
    Anonymous
    Inactive

    @infinity, M.O.D.

    Thanks guys. Looks like I didn't RTMFQ. The “manufacturing overhead is applied to work in process using predetermined annual overhead rate” part completely went over my head.

    #509772
    Anonymous
    Inactive

    @infinity, M.O.D.

    Thanks guys. Looks like I didn't RTMFQ. The “manufacturing overhead is applied to work in process using predetermined annual overhead rate” part completely went over my head.

Viewing 6 replies - 1 through 6 (of 6 total)
  • You must be logged in to reply to this topic.