Cost Accounting (14th Edition)

118 CHAPTER 4 JOB COSTING
Learning
Objective 7
Dispose of under- or
overallocated
manufacturing overhead
costs at the end of the
fiscal year using
alternative methods
. . . for example, writing
off this amount to the
Cost of Goods Sold
account
estimates made up to 12 months before actual costs are incurred. We now consider
adjustments that are needed when, at the end of the fiscal year, indirect costs allocated
differ from actual indirect costs incurred. Recall that for the numerator and denominator
reasons discussed earlier (pp. 103–104), we do not expect actual overhead costs
incurred each month to equal overhead costs allocated each month.
Underallocated and Overallocated Direct Costs
Underallocated indirect costs occur when the allocated amount of indirect costs in an
accounting period is less than the actual (incurred) amount. Overallocated indirect costs
occur when the allocated amount of indirect costs in an accounting period is greater than
the actual (incurred) amount.
Underallocated (overallocated) indirect costs =
Actual indirect costs incurred - Indirect costs allocated
Underallocated (overallocated) indirect costs are also called underapplied (overapplied)
indirect costs and underabsorbed (overabsorbed) indirect costs.
Consider the manufacturing overhead cost pool at Robinson Company. There are two
indirect-cost accounts in the general ledger that have to do with manufacturing overhead:
1. Manufacturing Overhead Control, the record of the actual costs in all the individual
overhead categories (such as indirect materials, indirect manufacturing labor, supervision,
engineering, utilities, and plant depreciation)
2. Manufacturing Overhead Allocated, the record of the manufacturing overhead allocated
to individual jobs on the basis of the budgeted rate multiplied by actual direct
manufacturing labor-hours
At the end of the year, the overhead accounts show the following amounts.
Manufacturing Overhead Control
Manufacturing Overhead Allocated
Bal. Dec. 31, 2011 1,215,000 Bal. Dec. 31, 2011 1,080,000
The $1,080,000 credit balance in Manufacturing Overhead Allocated results from multiplying
the 27,000 actual direct manufacturing labor-hours worked on all jobs in 2011 by
the budgeted rate of $40 per direct manufacturing labor-hour.
The $135,000 ($1,215,000 – $1,080,000) difference (a net debit) is an underallocated
amount because actual manufacturing overhead costs are greater than the allocated
amount. This difference arises from two reasons related to the computation of the
$40 budgeted hourly rate:
1. Numerator reason (indirect-cost pool). Actual manufacturing overhead costs of
$1,215,000 are greater than the budgeted amount of $1,120,000.
2. Denominator reason (quantity of allocation base). Actual direct manufacturing laborhours
of 27,000 are fewer than the budgeted 28,000 hours.
There are three main approaches to accounting for the $135,000 underallocated manufacturing
overhead caused by Robinson underestimating manufacturing overhead costs
and overestimating the quantity of the cost-allocation base: (1) adjusted allocation-rate
approach, (2) proration approach, and (3) write-off to cost of goods sold approach.
Adjusted Allocation-Rate Approach
The adjusted allocation-rate approach restates all overhead entries in the general
ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates.
First, the actual manufacturing overhead rate is computed at the end of the fiscal year.
Then, the manufacturing overhead costs allocated to every job during the year are
recomputed using the actual manufacturing overhead rate (rather than the budgeted
manufacturing overhead rate). Finally, end-of-year closing entries are made. The
result is that at year-end, every job-cost record and finished goods record—as well as