vi. Transferring completed units from work in
process to finished goods
1. In T-account form:
a. The sum of all amounts transferred
from work in process to finished
2. In journal entry form:
a. Debit Finished Goods and credit
Work in Process.
vii. Transferring finished goods to cost of goods sold
1. In T-account form:
a. Debit Cost of Goods Sold and credit
Finished Goods.
b. If only a portion of the units
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2. In journal entry form:
a. Debit Accounts Receivable and credit
Sales.
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Helpful Hint: As a concluding thought, remind students
that all inventory accounts are governed by the same
logic: Beginning inventory + Additions = Ending
Inventory + Transfers out. In the case of raw materials,
transfers out consist of both direct and indirect
IV. Schedules of cost of goods manufactured and cost of
goods sold
Learning Objective 6: Prepare schedules of cost of
goods manufactured and cost of goods sold and an
income statement.
A. Key concepts
ii. It calculates the cost of raw material and
direct labor used in production and the
amount of manufacturing overhead applied to
production.
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B. Product cost flows
iv. To create a schedule of cost of goods
manufactured, as well as a balance sheet and
income statement, it is important to
understand the flow of product costs:
2. Direct labor used in production and
manufacturing overhead applied to
production are added to direct materials to
arrive at total manufacturing costs.
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5. The cost of goods manufactured is added to
the beginning finished goods inventory to
arrive at cost of goods available for sale.
The ending finished goods inventory is
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V. Underapplied and overapplied overhead—a closer look
Learning Objective 7: Compute underapplied or
A. There are two key concepts related to this topic, the
first of which is:
i. Defining and computing underapplied and
overapplied overhead
1. The difference between the overhead cost
applied to Work in Process and the actual
overhead costs of a period is termed either
underapplied or overapplied overhead.
b. Overapplied overhead exists when
the amount of overhead applied to
jobs during the period using the
predetermined overhead rate is
greater than the total amount of
overhead actually incurred during the
period.
2. Computing underapplied or overapplied
overhead, an example:
a. Assume that PearCo’s actual
overhead and direct labor hours for
the year were $650,000 and 170,000,
Quick Check
−
underapplied and overapplied overhead
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ii. Disposition of underapplied or overapplied
overhead balances
1. Any remaining balance in the Manufacturing
Overhead account, such as PearCo.’s
$30,000 of overapplied overhead, is disposed
of in one of two ways:
2. The journal entry, in T-account form, to
close out PearCo’s $30,000 of overapplied
overhead into Cost of Goods Sold would be
as follows:
a. Debit Manufacturing Overhead and
credit Cost of Goods Sold.
3. Calculating the allocation of underapplied or
overapplied overhead between Work in
Process, Finished Goods, and Cost of
Goods Sold.
a. Assume the overhead applied in
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4. The journal entry to close out the $30,000
of overapplied overhead to each of the three
accounts would be:
a. Debit Manufacturing Overhead and
credit Work in Process, Finished
Goods, and Cost of Goods Sold.
5. In summary, there are two methods for
disposing of underapplied and overapplied
overhead.
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VI. Selected topics
A. Multiple predetermined overhead rates
i. The chapter discussion assumes that there is a
single predetermined overhead rate for an entire
factory called a plantwide overhead rate.
iii. While using multiple predetermined overhead rates
is more complex, it is also more accurate because it
reflects differences across departments in how
overhead costs are incurred.
B. Job-order costing in services companies
i. Although our attention has focused upon
manufacturing applications, it bears re-emphasizing
that job-order costing is also used in services
industries.
VII. Appendix 3A: the predetermined overhead rate and
capacity (Slide #74 is a title slide)
Learning Objective 8: Understand the implications of
A. Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation
base
i. This method was used throughout the chapter;
however, recently it has been criticized in two
ways:
B. Capacity-based overhead rates
i. The aforementioned criticisms can be overcome by
using “estimated total units in the allocation base at
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ii. The following example will help distinguish
between these two approaches.
1. Assume that a company leases a piece of
equipment for $100,000 per year. If run at
full capacity, the machine can produce
50,000 units per year.
Quick Check
−
estimated units of allocation base vs.
capacity of the allocation base
C. Income statement preparation
i. Critics suggest that the underapplied overhead that
results from idle capacity should be disclosed on
the income statement as the cost of unused
capacity − a period expense.
1. Using a measure of capacity in the
denominator of the predetermined overhead
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VIII. Appendix 3B: further classification of labor costs (Slide
#90 is the title slide)
Learning Objective 9: Properly account for labor costs
associated with idle time, overtime, and fringe benefits.
B. Accounting for idle time, overtime, and fringe benefits
i. Idle time − Machine breakdowns, material
shortages, power failures and the like, result
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ii. Overtime − The overtime premiums for all
factory workers are usually considered to be
part of manufacturing overhead. This is done
iii. Labor fringe benefits − These costs relate to
employment-related costs paid by an
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employment tax, and state unemployment
insurance.
1. These costs often add up to 30% to 40% of
an employee’s base pay.