4GP.1 PDOH Rates
A firm uses job-order costing and budgets 10,000 direct labor hours and twice as many machine hours for for next period. It also has the following budgeted costs for the next period.
- Direct labor wages: $100,000
- Direct materials: $150,000
- Equipment depreciation: $50,000
- Sales and marketing: $45,000
- Line supervisor salaries: $25,000
If the firm uses machine hours as its overhead cost driver, what is the firm’s pre-determined overhead rate (PDOH rate) for the next period?
The firm’s PDOH rate is the total budgeted overhead costs divided by the firm’s budgeted cost driver. The firm’s total budgeted overhead is the sum of the equipment depreciation and line supervisor salary lines, i.e. $75,000. (Sales and marketing are SG&A costs, and the direct costs are not overhead since they can be traced to individual product units.) The budgeted cost driver is 20,000 machine hours.
75,000 / 20,000 = $3.75 overhead cost per machine hour
So $3.75 is the firm’s PDOH for the upcoming period.
A firm has the following budgeted and actual costs.
- Direct materials: $5,000 (budgeted); $5,500 (actual)
- Direct labor: $19,000 (budgeted); $17,000 (actual)
- Factory lease: $1,500 (budgeted); $1,500 (actual)
- Factory utilities: $750 (budgeted); ($1,150 (actual)
- Headquarters lease: $1,000 (budgeted); $1,000 (actual)
The firm uses direct labor hours to apply overhead using job-order costing. The firm budgeted 100 direct labor hours for the current period but used 90 direct labor hours.
What is the firm’s PDOH rate?
The PDOH rate is the total budgeted overhead divided by total budgeted cost driver. The direct costs and headquarters lease are not overhead costs, but the factory leas and utilities are.
1,500 + 750 = 2,250 total budgeted overhead
2,250 / 100 budgeted direct labor hours = $2.25 OH cost per direct labor hour
$2.25 is the PDOH rate.
4GP.2 Overhead Allocation & Unit Cost
The firm has $2,000,000 in budgeted overhead costs and 200,000 budgeted direct labor hours. Three jobs during the period used, respectively, 10 direct labor hours, 15 direct labor hours, and 9 direct labor hours.
How much overhead is applied to these three jobs?
The PDOH rate is $2,000,000 / 200,000 = $10 OH cost per direct labor hour.
The applied overhead for each job is the direct labor hours multiplied by the PDOH rate.
10 direct labor hours Job 1 * $10 PDOH rate = $100 applied overhead Job 1
15 direct labor hours Job 2 * $10 PDOH rate = $150 applied overhead Job 2
9 direct labor hours Job 3 * $10 PDOH rate = $90 applied overhead Job 3
A firm has a PDOH rate of $100 per machine hour. The firm has a job, AAA, that has the following costs and consumption. (AAA consists of 75 units.)
- Direct materials: $51,100
- Direct labor: $112,150
- Direct labor hours: 1,040
- Machine hours: 500
(A) What is the total overhead cost for job AAA?
(B) What is the overall cost for job AAA?
(C) What is the cost per unit of AAA?
Applied overhead for job AAA is the PDOH rate times job AAA’s consumption of the cost driver.
$100 * 500 = $50,000
The overall cost for job AAA is the sum of the job’s direct materials, direct labor, and applied overhead.
$51,100 + $112,150 + $50,000 = $213,250 total cost for job AAA
Given that this job included 75 units, the per unit cost is simply the overall job cost divided by 75.
$213,250 / 75 = $2,843.33 per unit cost for job AAA
4GP.3 OH Control Account
Jones, Inc. has a PDOH rate of $5.50 per mile driven. Assume the firm pays all costs in cash. The firm drove 500,000 miles this period and incurred $2,000,000 in equipment costs and $1,000,000 in maintenance costs.
(A) What is the firm’s debit to WIP for the period?
(B) What is the firm’s credit to cash?
(C) What is the balance in the overhead control account during the initial trial balance (before any closing entries)?
The debit to WIP is the applied overhead. OH applied is the PDOH rate multiplied by the actual consumption of the cost driver.
$5.50 OH cost per mile * 500,000 miles driven = $2,750,000 applied OH cost
The credit to cash would be based on the actual costs (remember that we’re assuming the firm pays all actual costs in cash for this problem). The firm incurred $3,000,000 in actual costs (i.e. 2,000,000 equipment costs + 1,000,000 maintenance costs). Thus 3,000,000 is the credit to cash.
The balance in the overhead control account will be the difference between actual overhead costs and applied overhead costs. Based on the above answers (A and B), that difference is $250,000 (i.e. $3,000,000 – $2,750,000 = 250,000).
This 250,000 balance is a debit, because the actual costs (which are debited to the control account) are greater than the applied costs (which are credit to the control account).
Brenda’s Bakery, LLC has a $1.15 per baking hour PDOH rate. The firm uses 2,500 baking hours this period. and incurred $2,400 of actual overhead costs.
Brenda’s has 50 units in production at the end of the period and 10,000 units completed during the period (75% of which are already sold).
(A) What is the balance of the overhead control account during the initial trial balance?
(B) What is the likely closing entry for the overhead control account if the firm considers its balance from part A to be small and immaterial?
(C) What is the likely closing entry for the overhead control account if the firm considers its balance from part A to be small and immaterial?
(D) What is the difference in next period’s income between the closing entries in part A and part B?
The closing balance is the difference between actual overhead costs and applied overhead costs. Actual overhead costs are given to us, i.e. $2,400.
1.15 * 2,400 = $2,875
The difference between these two is $475, which is also the closing balance of the overhead control account (before closing entries). It is a credit balance because applied overhead costs are greater than actual overhead costs.
If this balance is small and immaterial , the firm is likely to close the overhead control account directly into COGS.
Dr. OH control 475
Cr. COGS 475
If the balance is considered large and material, the firm is likely to close out the account ratably to the WIP, FG, and COGS accounts, likely based on how many units are represented by each account.
The total units between the three accounts is 10,050. WIP represents 50 units, finished goods represents 2,500, and COGS represents 7,500.
50 WIP units / 10,050 total units = 0.0050
0.0050 * $475 = $2.38
2,500 FG units / 10,050 total units = 0.2488
0.2488 * $475 = $118.18
7,500 COGS units / 10,050 total units = 0.7463
0.7463 * 475 = $354.49 => 354.44 (due to rounding, necessary to close account).
If the firm pursues the closing entry from part C, the firm puts some of its costs on the balance sheet, to almost certainly hit the income statement next period. The likely impact of the latter option would be an increase to this period’s income, by $125.56, and a decrease in next period’s income by the same amount.
4GP.4 Departmental PDOH Rates
Trial Balance, Inc. has three departments, which each apply overhead to jobs based on a departmental overhead rate as follows.
- Department A: $15 per direct labor hour
- Department B: $1.25 per machine hour
- Department C: $10.15 per engineering hour
Job BB-481516, which consists of 120 units, consumes the following.
- $1,500 direct materials
- $2,500 direct labor (at $10 per hour)
- 20 engineering hours
- 25 machine hours
(A) What is job BB-481516’s total overhead cost?
(B) What is job BB-481516’s total cost?
(C) What is job BB-481516’s unit cost?
Job-BB481516 will have overhead applied by each department based on it’s consumption of the cost drivers for that department.
2,500 DL cost / 10 DL rate = 250 DL hours consumed
250 * 15 PDOH rate = $3,750 Dept. A overhead applied
25 machine hours consumed * 1.25 PDOH rate = $31.25 Dept. B overhead applied
20 engineering hours consumed * 10.15 PDOH rate = $203 Dept. C overhead applied
$3,750 + $31.25 + $203 = $3,984.25
The job’s total cost is the sum of its overhead and direct costs.
$1,500 DM + $2,500 DL + $3,984.25 = $7,984.25
Unit cost for this job are the total cost divided by the number of units in the job.
$7,984.25 total job cost / 120 units = $66.54 unit cost
Trial Balance, Inc. (the same company as problem 4GP.4.E1) consumes the following during the period.
- $1,000,000 total direct materials
- $300,000 total direct labor (at $10 per hour)
- $275,000 Department A actual overhead cost
- $115,000 Department B actual overhead cost
- $500,000 Department C actual overhead cost
- 10,000 engineering hours
- 250,000 machine hours
The firm uses a single overhead control account that includes all three departments’ overhead costs. Firm has a policy about closing out the joint overhead control account. If the trial balance of the account is greater than $50,000, then it is closed out based on the units represented by the WIP, FG, and COGS accounts. If the balance is less than $50,000, the account is closed out to COGS.
The firm has the following total units represented by the following accounts.
- WIP: 50,000 units
- FG: 10,000 units
- COGS: 100,000 units
What is the closing entry for the overhead control account?
The first step in this problem is to determine the trial balance for the overhead control account at the end of the period. This balance is the difference between actual overhead and applied overhead.
Actual overhead cost:
275,000 + 115,000 + 500,000 = $890,000 total actual overhead
Applied overhead cost (see earlier problem for PDOH rates):
30,000 DL hours * 15 PDOH rate + 250,000 MH * 1.25 PDOH rate + 10,000 * 10.15 = 864,000 applied overhead costs
The difference between these two is 26,000 (i.e. 890,000 – 864,000). This is a debit balance because he actual costs are greater than applied costs. Since this balance is less than $50,000, company policy allows it to be closed out directly to COGS.
Dr. COGS 26,000
Cr. Overhead control account 26,000