 Hello, in this lecture, we're going to work some smaller test type problems, problems that could be smaller to fit into a multiple choice type format. So first we have here, company allocates overhead to production on the basis of direct labor hour. First, a word from our sponsor. Well, actually, these are just items that we picked from the YouTube shopping affiliate program. But that's actually good for you because these aren't things that were just given to us from some large corporation, which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased and used ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor, which I think is ideal for what I do, which is of course the screen recording and the editing. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model given you access to all the courses, courses which are well organized, have other resources like Excel files and PDF files to download and no commercials. At the beginning of the year, the company estimated total overhead of $345,600, materials of $406,000 and direct labor of $216,000. During the year, the company incurred $414,000 in material costs for $12,800 in overhead costs and $220,000 in direct labor costs. Compute the amount of overhead applied to jobs during the year. So what we have to do to understand this is the idea that we're going to come up with a predetermined overhead rate so that we can apply the overhead to the jobs as the jobs are going. So what we do that in order to do that, we're going to use the numbers before the period at the beginning of the period in this case in order to come up with that rate and then use that in order to apply the overhead based on the direct labor. So at the beginning of the year, the company estimated overhead to be, so we're going to say overhead, we think it's going to be at the beginning of the year $145,600, we're just estimated overhead, all that stuff you just put in the bucket. We don't know which a job to apply it out to. And we think that the direct labor is going to be $216,000 and direct labor has nothing to do with the overhead, but we're going to use the direct labor in order to come up with our rate to apply to the overhead. So what we're going to say is this, if there's going to be $345,600 in total overhead divided by the $216,000, then I'm going to go to the home tab, numbers, increase the decimals. So that's $160 or we could represent it in terms of a percent, which would be $160,000. Now real quick, why would we do that? Because the direct labor here is going to determine how large the job is. The more direct labor goes into a job, the bigger the job is and therefore the more overhead we need to apply to it. That's why we're using the direct labor to allocate the overhead because we don't know how much overhead to allocate to a job because all jobs are different and we can't just allocate an even amount of overhead for that reason. So now that we have our number, then we just need to figure out what the job the direct labor was during the year and they give us all this other information we don't need to know. During the year the incurred materials of this, we don't care, overhead of this, you would think that would be important because that's the overhead incurred during the year. But what we're doing is trying to find out the estimated overhead to apply during the year. So what we're going to look for is the direct labor in the year and actually this is the direct labor, the $220,000 direct labor, not the overhead costs. So we're going to take that, multiply the $160 times the $220,000 and we come up with the $352,000. That's the amount of overhead that we are going to apply out even though the overhead in the actual, that we actually incurred is actually greater, $412,800 and that's because the number we came up with, of course, is an estimate at the beginning of the year and we're going to have to reconcile that to the actual that actually happened throughout the year. Next one says, company uses a job order costing system. During one month, company purchased 214,800 raw materials on credit, issued materials to production of 209,000 of which 34,000 were indirect. Company incurred factory payroll of 158,400 paid cash, of which 44,200 was indirect labor. Company uses a predetermined overhead rate of 150% of direct labor cost. Company beginning and ending working process are 69 and 298 respectively. The cost of production transferred to finished goods inventory. All right, so that's a lot to take in there. What we're trying to do here is figure out how much should be transferred to ending inventory. If it's going to ending inventory, it's leaving the working process account. So that's, that's what I'm going to focus in here. We could do this in T account formation or we could do it in kind of a chart or a calculation. I'm going to take a look at the T account because I think that's more of a visual look at it. So I'm going to take a working process, the WIP account working process. I'm going to merge that here. I'm going to underline it there and make our T like so and put on the left-hand side like this. All right, so this is what we have. And when we look at the working process account, we're going to start with the beginning balance. And the beginning balance they said down here in the working process was 69. That's what it started off with. It's an asset. It's an, it's an inventory account. 69 is what we started off with. What we're trying to get to is the amount that got transferred out. So we're going to have to see the activity during the period and then subtract it from the ending balance. Now what is included in working process? Well, working process includes the direct materials. It includes the direct labor and it concludes the factory overhead. So I'm just going to call those are the things we're looking for. Once we get those things, then we know that we have an ending balance here. And they already gave us that. So the ending balance is going to be this 29 and I'm going to make it a credit or actually it's going to be a debit over here. It's going to be the 29, 800. That's what we're going to end up. We can put a line under that if we want. We can say that's going to be our ending balance. So now let's see what else they gave us here. So they gave us, if we, if we look at it in terms of a table, we have direct materials and direct labor that we can take a look at. So we purchased 214, 800. That really doesn't concern us right now because they told us the amount that got issued to work and process. That's what we're starting here. So we issued materials to production of 209. That's what we're starting here. That's what we're going to get into our working process account. But of the 209, they say that 34, 2 was overhead. So the overhead amount of it is 34, 200. Therefore the direct materials, I'm going to go ahead and underline that home tap font group underline is going to be the 209 that got issued minus the 34, 200. This is the amount that we know how to apply to the job. Therefore it's going to go into our working process. And so we know that's going to be one of our numbers that are going to go into the working process for the asset. And then I'm going to go ahead and center this as well and underline that. All right. We may even want to bold it like that. Okay. The next thing we have is a payroll of 158.4. And then it says that of that, 44, 200 was indirect. So that's not direct. We can't apply 44, 200 directly to a job. Therefore I'm going to underline that. We're going to subtract that out. So that means the 158.4 total payroll minus the 44, 200, we cannot apply to a job means that the 114.200 is the amount that we can apply to the job. And there we have that. We're looking for the overhead. And it's very tempting for us to say the overhead is this plus that. That's what actually was incurred during the year. But remember that we use the predetermined overhead rate to estimate what the overhead should go to. And it's hard to see in this picture because we're not looking at the jobs. The problem is I can't apply this to the jobs. That's the whole reason it's in the overhead. We're going to use the labor in order to help us apply it to the jobs. We're not going to apply them to the jobs in this problem, but that's the conceptual reason why we cannot just take the actual overhead and dump it in the working process because the working process needs to be backed up by job. So we're going to be able to apply it by job by allocating based on 1.5 predetermined overhead rate. Home tab, font group, add decimals or make it a percent. Then I'm going to underline that. And that means that the amount that we can apply to a job is the 114.2 times the 150 percent. That's our overhead that gets applied, applied something like that. Okay. And then that's going to equal the 171.3. Okay. So there's what we have there. Now I'm going to scroll down just a bit and I'm going to add another row, insert, a row, shift down. Okay. I don't know if that disturbed too many things, but then I mean if we add this up, we have the sum now, this equals the sum of these. This is what we have in there. And we know that the ending inventory is this. So what we need then, I'm going to go ahead and underline that. That's what we have. This is where we need to get. The difference between those two numbers is then what we transferred out. That's what's going to leave the working process. So it's going to be the 477.2 minus the 29.8. That's what's going to be transferred out. I'm going to represent it with a credit by putting a negative and brackets around it. And so you could check that. You could say this minus this is the 29.800. That means that this is the amount that got transferred out of the working process in order to go to the finished goods. And if you wanted to calculate it with a table or something like that, you'd have to take the beginning working process 16900 plus the direct labor plus the direct material plus the overhead we had minus the ending balance. This is how it would basically be shown in an answer key or something of a type of problem like this. But notice it could be easier in many ways to see it in terms of a T account because of the visual representation of it. Next one says company applies overhead based on the direct labor cost estimated overhead and direct labor costs for the year were one nineteen five hundred and one twenty five seven hundred respectively during the year actual overhead was one eight one hundred and actual direct labor cost was one fourteen five hundred the entity the entry to close the over under applied overhead of the year assuming an immaterial amount would include what okay so this time we're looking at the overhead so I'm going to say overhead and focus in on that as our T accounts we can see the visual of the T account here so I'm going to underline that going to put our T here so put that left hand side left border there is our T at this time. Now the company applies overhead based on direct labor cost estimated overhead direct labor costs are going to be one nineteen so I'm going to say one one nine five hundred is our rate and we had the one twenty five of direct I'm sorry the one one nine five hundred is the overhead at the beginning of the year so that's what we're going to use in order to estimate what will happen during the year and then we had one twenty seven one twenty five seven hundred of direct labor so this is this is overhead direct labor we're going to use this to determine our rate so I'm going to underline this we're going to say all right well if there is one nineteen five hundred estimated overhead divided by the estimated direct labor one twenty five seven it's going to go to the home tab number and add we're going to use ninety five percent point nine five or percent ninety five percent to allocate the overhead meaning we're going to use the direct labor that will actually happen during the time period at a rate of ninety five percent in order to allocate the overhead two jobs the jobs being different in size the reason we need to allocate using direct labor so then it says during the year actual overhead was one oh eight so if we look at that overhead T account the actual overhead was one oh eight one hundred that's what actually happened that includes like depreciation on the factory anything that says factory utilities on the factory you know indirect labor on the factory anything on the factory or any process that we cannot apply to the job directly goes into there and then we're going to use this number to allocate the amount that actually happened based on direct labor so direct labor was one one four five hundred so I'm going to go ahead and underline that so then we're going to say that this equals the ninety five percent rate times the direct labor one fourteen five this is the amount that we can actually apply to the job so that's the amount that's going to go out of I'm going to make it a credit it's going to go out of the overhead and apply it to the job and notice that it's only an estimate of course and therefore it's not exact this estimate doesn't equal what actually happened this number is bigger than this number if I see you how much bigger it's going to be equal to the sum of this because it's going to be this number minus this number we've got a 752 credit balance at this time now when we start the next period we don't want a 752 balance and there we want that to be zero so we can estimate what's going to happen next time so what does that mean we have to do we have to make an adjustment at the end of the period which is going to be a debit to 752 and that will of course do what to the T accounts going to make this go down to zero which is what we want to happen so that we can make a new estimate so what's the adjusting entry going to be in this case it's a debit to the overhead a debit of 752 to get it to go to zero and then we're going to just dump it somewhere we're going to dump it in the cost of goods sold usually we dump it in the cost of goods sold why because hopefully it's immaterial and cost of goods sold is related to in it's the income statement account related to inventory and so if it's small it's not going to affect cost of goods sold notice cost of goods sold is a expense account this is a credit so we're actually doing the cost of goods sold is actually going down and expense accounts going down doesn't normally happen this is a rare exception to make an expense account to go down but the idea is it's immaterial and it will close out to retained earnings next time so we won't have to worry about it again it'll just kind of go away once it's closed out and then and then we can start over with our new estimate with a clean slate