ADMS 1000 Lecture Notes - Lecture 9: General Ledger, Subledger, Oil PlatformPremium
Course CodeADMS 1000
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ADMS 1000 Lecture 9 Notes – The application of manufacturing overhead, The Concept of a
Clearing Account and Non-manufacturing Costs
• Since actual manufacturing overhead costs are charged to the Manufacturing Overhead
control account rather than to Work in Process, how are manufacturing overhead costs
assigned to Work in Process?
• The answer is, by means of the predetermined overhead rate.
• Recall from our discussion earlier in the chapter that a predetermined overhead rate is
established at the beginning of each year.
• The rate is calculated by dividing the estimated total manufacturing overhead cost for
the year by the estimated total units in the allocation base (measured in machine-hours,
direct labour-hours, or some other base).
• The predetermined overhead rate is then used to apply overhead costs to jobs.
• For example, if direct labour-hours are the allocation base, overhead cost is applied to
each job by multiplying the number of direct labour-hours charged to the job by the
predetermined overhead rate.
• To illustrate, assume that Rand Company has used machine-hours in computing its
predetermined overhead rate and that this rate is $6 per machine-hour.
• Also assume that during April, 10,000 machine-hours were worked on Job A and 5,000
machine-hours were worked on Job B (a total of 15,000 machine-hours).
• Thus, $90,000 in overhead cost (15,000 machine-hours × $6 = $90,000) would be
applied to Work in Process.
• The flow of costs through the Manufacturing Overhead account is detailed in Exhibit 5–
• The “actual overhead costs” in the Manufacturing Overhead account shown in Exhibit
5–8 are the costs that were added to the account in entries (2) through (6).
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