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Did you learn? Discuss the issues and problems associated with accounting for factory overhead. How is actual overhead cost accumulated? Describe the basic content of the Factory Overhead account. What is meant by over- and underapplied overhead, and how do such amounts emerge from within the accounting system? Visit the Bookstore. We use cookies on this site to enhance your user experience. For a complete overview of all cookies used, please see the cookie policy. Opt out of cookies. Manage consent.
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For instance, your business phone has a regular monthly rate. This is an example of semi-variable overhead. Whatever bookkeeping solution you use, you should make sure your overhead costs are categorized. That way, you keep accurate business records, produce accurate financial statements , and see where your money is going. Overhead is either general, or falls into a specific category. General overhead affects the whole business—rent is a good example of a type of general overhead.
Specific overhead categories apply to specific parts of your company. For instance, some of your overhead is indirectly connected with creating your product—such as the cost of kitchen utilities. Other specific overhead is a result of back office tasks—like accounting, payroll, and general business administration.
The exact categories you use for your overhead will depend on your business; to figure out which ones fit the needs of your business, your best bet is to chat with a bookkeeper. Selling overhead: the cost of marketing your business e. Administrative overhead: what it costs you to run your back office e. Research overhead: the cost of researching new products or markets e. Transportation overhead: the cost of travel not directly related to your product or service e.
Manufacturing overhead: the cost of running your manufacturing facilities, such as rent, janitorial services, and equipment maintenance. Your overhead rate is how much money you spend on overhead compared to how much revenue you generate.
Say you run a lemonade stand. Those are both part of overhead. And unless you factor them in, your profit will be lower than your profit projections. If you run a lemonade stand year-round, you probably make fewer sales in December than in August. And, since some of your overhead is variable and semi-variable—such as the electricity bill—your overhead will be variable, too. This is when comprehensive financial records are useful.
If manufacturing overhead has a debit balance, the overhead is underapplied, and the resulting amount in cost of goods sold is understated. The adjusting entry is:. If manufacturing overhead has a credit balance, the overhead is overapplied, and the resulting amount in cost of goods sold is overstated.
Since manufacturing overhead has a debit balance, it is underapplied, as it has not been completely allocated. The adjusting journal entry is:. To adjust for overapplied or underapplied manufacturing overhead, some companies have a more complicated, three-part allocation to work in process, finished goods, and cost of goods sold.
This method is typically used in the event of larger variances in their balances or in bigger companies. You will learn more about this in future cost or advanced managerial accounting courses. Kraken Boardsports manufactures winches for snow and ski boarders to snow ski without a mountain or water ski without a lake Figure.
End-of-year data show these overhead expenses:. How much overhead was overapplied or underapplied during the year? What would be the journal entry to adjust manufacturing overhead? Job order costing and overhead allocation are not new methods of accounting and apply to governmental units as well. Figure Why is the manufacturing overhead account debited as expenses are recognized and then credited when overhead is applied?
Expenses normally have a debit balance, and the manufacturing overhead account is debited when expenses are incurred to recognize the incurrence. When the expenses are allocated to the asset, the work in process inventory, the expense account manufacturing overhead is credited.
This is in accordance with the expense recognition principle.
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