This means that the predetermined allocation rate was exactly what was incurred during the period. In this case, the applied overhead equaled the actual overhead, leaving a zero balance. The next graphic provides a visual representation of the cost flow associated with the Factory Overhead account. Since the Factory Overhead account is debited for actual overhead incurred and credited for allocated (applied) overhead, the general ledger account would appear as follows (the job costs are newly assumed for this illustration): In this case, actual overhead goes in, and applied overhead goes out. Amounts go into the account and are then transferred out to other accounts. Instead, it is a “suspense” or “clearing” account. It does not represent an asset, liability, expense, or any other element of financial statements. To recap, the Factory Overhead account is not a typical account. A typical entry to record factory overhead costs would be as follows: Importantly, selling and administrative costs not related to production (e.g., advertising, salaries for non-production related staff, sales commissions, rent of the corporate offices, etc.) are separately expensed, and are not part of factory overhead. The indirect materials relates to supplies and components that are not a significant cost item. This can include break time of line workers, shop managers, maintenance, guards, and so forth. The indirect labor would relate to the cost of factory staff not directly involved in production. The table below provides representative examples. But, what is the source of the debits to Factory Overhead?Īs the overhead costs are actually incurred, the Factory Overhead account is debited, and logically offsetting accounts are credited. An account called “Factory Overhead” is credited to reflect this overhead application to work in process. Chapter 24: Analytics for Managerial Decision MakingĪs previously shown, overhead is applied based on a predetermined formula, after careful analysis of the appropriate cost drivers for this allocation.Chapter 23: Reporting to Support Managerial Decisions.Chapter 22: Tools for Enterprise Performance Evaluation.Chapter 21: Budgeting – Planning for Success.Chapter 20: Process Costing and Activity-Based Costing.Chapter 19: Job Costing and Modern Cost Management Systems.Chapter 18: Cost-Volume-Profit and Business Scalability. Chapter 17: Introduction to Managerial Accounting.Chapter 16: Financial Analysis and the Statement of Cash Flows.Chapter 15: Financial Reporting and Concepts.Chapter 14: Corporate Equity Accounting.Chapter 12: Current Liabilities and Employer Obligations.Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles.Chapter 10: Property, Plant, & Equipment.Chapter 6: Cash and Highly-Liquid Investments.Chapter 5: Special Issues for Merchants.Chapter 1: Welcome to the World of Accounting.
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