traceable to a specific job, the cost is considered indirect labor and is debited to the Manufacturing Overhead account. Assume Toll Brothers recorded the following costs: See Exhibit 3 – 5 for a summary of how these costs would appear in the Manufacturing Overhead and Work in Process Inventory accounts. Exhibit 3 – 5 Recording Direct and Indirect Labor Costs RECORDING ACTUAL MANUFACTURING OVERHEAD Actual manufacturing include all of the indirect manufacturing costs, or those that cannot be traced to specific units or jobs. These costs are not recorded directly in the Work in Process Inventory account. Instead, these indirect costs are accumulated in the Manufacturing Overhead account. We have already recorded the indirect materials and indirect labor costs in the Manufacturing Overhead account. Assume Toll Brothers recorded the following additional manufacturing overhead costs during the month: These actual manufacturing overhead costs are added to the Manufacturing Overhead account (see Exhibit 3 – 6). Actual manufacturing overhead costs are always shown on the left-hand (debit) side of the Manufacturing Overhead account. Next we show how these indirect costs are applied to the Work in Process Inventory account using the predetermined overhead rate. RECORDING APPLIED MANUFACTURING OVERHEAD Remember that manufacturing overhead are applied to jobs based on the predetermined overhead rate that was estimated at the beginning of the accounting period. As jobs are worked on during the period, we determine the amount of manufacturing overhead cost to apply to specific jobs by multiplying the predetermined overhead rate by the actual number of direct labor hours worked. In our home-building example, we estimated the manufacturing overhead rate to be $75 per direct labor hour. This rate is not the cost of the direct labor itself, but rather the amount of manufacturing overhead cost that needs to be added for each direct labor hour worked to cover the indirect costs of building the home (equipment depreciation, insurance, supervision, etc.).
To eliminate the $3,000 debit balance in the Manufacturing Overhead account, we need to credit the Manufacturing Overhead account and debit the Cost of Goods Sold account. The journal entry to dispose of the underapplied overhead is: The effect of this entry is to increase the Cost of Goods Sold account by $3,000. If Manufacturing Overhead had been overapplied (with a credit balance), we would have debited the Manufacturing Overhead account to eliminate the balance and credited (decreased) the Cost of Goods Sold account. CHAPTER SUMMARY LO 1: Describe the key differences between job order costing and process costing. Process costing is used in companies that make homogeneous products using a continuous production process. Job order costing is used in companies that make unique products or provide specialized services. LO 2: Describe the source documents used to direct materials and direct labor costs to the job cost sheet. Direct materials are issued to production by using a materials requisition form showing the costs and quantities of all materials requested and the job they were used for. Direct labor costs are recorded using labor time tickets showing the amount of time workers spent on each specific job. The costs incurred for each job are recorded on a separate job cost sheet. LO 3: Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. Because manufacturing overhead costs cannot be traced directly to individual jobs, we use an allocation base or cost driver to apply manufacturing overhead cost to specific jobs. The predetermined overhead rate is calculated by dividing the estimated total manufacturing overhead cost by the estimated value of the allocation base. Manufacturing overhead is applied to specific jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base used on the job. LO 4: Describe how costs flow through the accounting system in job order costing. Initially, raw material purchases are recorded in the Raw Materials Inventory account. When materials are placed into production, direct materials are recorded in the Work in Process Inventory account; indirect materials are recorded in the Manufacturing Overhead account. When costs are incurred, direct labor is recorded in the Work in Process Inventory account; indirect labor is recorded in the Manufacturing Overhead account. Actual manufacturing overhead costs are recorded on the debit side of the Manufacturing Overhead account.