JOB ORDER COSTING – ILLUSTRATIVE EXAMPLE:

Toymart Toy Company manufactures tricycles. The company has automated production and
allocated Overhead based on machine hours. ABC Toys expect to incur $200,000 of
manufacturing overhead costs and to use 8,000 machine hours during 2012. ABC toys had no
beginning inventory. It recorded the following transactions during January.

1. Purchased direct materials (on account) for $65,000

2. Purchased indirect materials (on account) for $10,000
3. Incurred other manufacturing overhead cost (on account) for $6,000
4. Used direct materials - $60,000
5. Incurred direct labor costs- $50,000
6. Used $4,000 of the indirect materials (that was purchased in #2)
7. Allocated manufacturing overhead for January

The company actually used 600 machine hours in January.

Requirements:
1] Calculate the Pre-determined Manufacturing Overhead Rate.

2] Record the Journal Entries for the purchase of materials & overhead (items #1, #2 & #3)

3] Record the Journal Entries for use of direct materials and labor (items #4 & #5)

4] Record the Journal Entry for allocation of overhead

5] Record the journal entry to close the allocated balance of the overhead account

STEP 1
Calculate the Pre-determined Manufacturing
Overhead Rate
Rate =
Budgeted OH Cost / Budgeted Activity
($200,000 / 8,000)
= $25 per Machine Hours

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 STEP 2
Record the JE for Acquisition of Material, Labor
& Overhead
 
Direct Material ($65,000)
In-direct material ($10,000)
Other Overhead ($6,000)
Direct Labor ($50,000)

 
STEP 3
Record the Journal entry for DM & DL to WIP
DM ($65,000)
DL ($50,000)
Move to WIP ($115,000)

 
 
STEP 4
Allocate OH to WIP Based on Allocation Base x
Rate
Hours = 600
x Rate = $25
Amt. Alloc = $15,000

 
 
STEP 5
Record JE for Over/Under OH
Actual OH ($10,000)
Allocated OH ($15,000)
Over-allocation = $5,000

General Ledger Account Postings (T-Accounts):

Direct Material   Direct Labor   Overhead  

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 $65,000 $65,000   $50,000 $50,000   $15,000 $6,000  
              $4,000  
$0     $0     $5,000    
             
             
             
      WIP        
      $65,000 $125,000        
      $50,000          
      $10,000          
      $0          

WIP   Finished Goods   COGS

$65,000 $125,000 $125,000 $125,000 $125,000 $5,000
$50,000          
$10,000              
$0     $0     $120,000  

Journal Entries:
1] Pre-determined Manufacturing Overhead Rate Calculation.

Pre-determined OH Rate = $200,000 / 8,000 = $25 per Direct Labor Hour

2] Journal Entries for the purchase of materials & overhead (items #1, #2 & #3)

Materials Inventory (direct) $65,000

Accounts Payable $65,000

Materials Inventory (indirect) $10,000

Accounts Payable $10,000

Manufacturing Overhead $6,000

Accounts Payable $6,000

3] Journal Entries for use of direct materials and labor (items #4 & #5)

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 Work in Process $60,000
Materials Inventory $60,000

Work in Process $50,000

Wages Payable $50,000

4] Journal Entry for allocation of overhead

Work in Process $15,000

Manufacturing Overhead $15,000

Calculation:
600 x $25 = $15,000

5] Journal Entry close the under-allocated balance of the overhead account

Manufacturing Overhead $5,000

COGS $5,000

Calculation:
Actual OH = $10,000 (#3 + #6 - 6,000 + 4,000)
Allocated OH = $15,000
Over-allocated OH = $5,000

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