 in this presentation we will enter a journal entry to allocate the factory overhead to work in process to allocate the factory overhead to jobs within the job cost system we're going to enter the journal entry into our general journal 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 purchase and use ourselves bayer dynamic not sure if i said that right but this is the dt 770 pro 250 ohm studio reference closed back headphones i wear headphones basically every day for a large part of the day they are important to me therefore i've gone through many different kinds of headphones i've had these for some time and they've worked quite well they fit over my ears but i'm still able to put my 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access to all the courses courses which are well organized have other resources like excel files and pdf files to download and no commercials use that to post to our general ledger and then use the general ledger to create the trial balance the trial balance in order of assets liabilities equity income and expenses debits minus the credits equal in zero meaning we are in balance nothing in income at this time we of course focusing in on the inventory type accounts as we track through the cost flow in the job cost system what we have at this time is we've got this factory overhead number that we've been putting together and that's been everything that we couldn't apply to a job that's part of what we work on so we put indirect labor in there because we didn't know which job to put it to we put indirect materials in there because we didn't know where to put it to anything on the factory we put in there depreciation on the factory any rent on the factory we put into this bucket because we think it should be part of the inventory but we don't know which job and therefore couldn't put it into work in process because we couldn't support it by the job cost sheets and now we're going to have to take this bucket and somehow report it to the job cost sheets because it needs to go there some way and somehow so we have to use some type of allocation method to do that now to do that we're going to have what's known as a predetermined overhead rate so we're going to just give it to us here which is going to be 1.6 of the direct labor and so note that a little bit confusing in terms of why we would do that or how to explain it to someone why we're doing what we're doing here what we're doing on the predetermined overhead rate is we're trying to find some kind of estimate that we can use to allocate this overhead cost to the jobs now if you if this was the problem let's think through a few different ways how we might figure that problem out and see why people have come up with this predetermined overhead rate so our problem is to apply this 7100 to these jobs and we have one two three four five of them one two three four five jobs so if we if that was our task just to go through the thought process you might say first well if we have 7100 and we have one two three four five jobs we can divide by five and we can apply 1422 them and that's true there's a couple problems with that however first is that this number isn't known yet until the end of the month so and we can't wait until the end of the month to know what's in there and and usually in this problem we've recorded it off all of the expenses first and then we applied it out afterwards because it's easier to see the flow that way but in practice oftentimes as we make these different jobs we would have to apply it out overhead to them when we finish the job so that we can apply it out as we go so we wouldn't know what the total is for let's say the month in overhead and especially for things like the utility bill and rent and depreciation because we don't record those till the end so this this factory overhead number the actual factory overhead number will be much higher in the end of the month most likely and we're going to need to include those even in jobs that we had at the beginning of the month that's one problem another problem is that these jobs are not all the same size like if you if you imagine a construction company some of these jobs could be much larger than other jobs and so even if we knew the exact number of what will be an overhead at the end of the month we couldn't apply them to the jobs evenly because the jobs are different sizes that should that doesn't seem right to do that so what we need to do is one come up with some type of estimate of what we think total overhead would be so we can apply it out correctly and then two we need to find some way to apply out more to the large jobs and less to the small jobs that's our task so the way we're going to do that is one we're going to have an estimate of what we think is a good driver of the overhead how do we know which jobs are large and small one way is we can say well the jobs that have more direct labor are larger than the other jobs so we could use direct labor as kind of ratio for us to apply out more to some jobs than others so in this case job b15 had more direct labor than job b19 we would have seen more overhead then should be applied to it so so we're going to use direct labor as as not not as part of overhead because it's direct labor it's not overhead that went directly to work in process but as a way to see how big one job is to another in comparative a ratio type of analysis so and we're going to have to estimate it because we don't know this year what's going to happen so we'll have to estimate it probably the most simple way is based on last year's numbers we look at last year's numbers look at total direct labor and then make any adjustments we have to it and then we're also going to look at the total factory overhead probably from last year or last month last month's overhead and figure out how much it was and then make any adjustments to it for this month that we think based on our projections and then what we'll do is we'll just take the overhead divided by the direct labor and use that as a ratio and if we do that that's where we're getting this one point six so we're going to think that we're going to imagine that that process happened we made some type of estimate about what we think the predetermined overhead rate was based on last last year's numbers and projections into the future we based the direct labor same thing we made an estimate of what we think it will be for the entire month this time based on last year and we use direct labor because it's going to give us a cost driver that will be relevant to know how big a job is relation to the other jobs and then we divided them out and said that we're going to get a predetermined overhead rate of 1.6 so what we're going to so now once we have that once we're at this point then it becomes pretty easy to apply this out it's still a little bit more difficult to explain so what we'll do is we'll go over to the job cost sheets over here and and what we're going to say so now we'll scroll over to our job cost sheets and we'll apply this out per job and hopefully this will make more sense as we do so so we're going to scroll over here's our job cost sheets here and here's our formula for the predetermined overhead rate it's the estimated manufacturing overhead cost divided by the estimated total units in the in the allocation base again the fact that it's an estimate could be a little bit we could have a very detailed type of estimate or we basically could use last year's manufacturing overhead or last month's manufacturing overhead divided by the total units in the activity base which in our case is the direct labor so we're using direct labor in order to to apply this out we're going to say we came up with 1.6 based on that estimate once we have that then all we have to do is say okay the factory overhead that we're going to apply to say job b15 is just going to be equal to the direct labor that's in this job times 1.6 and that's going to give us the amount that we're going to apply a factory overhead so it's just an estimate remember factory overhead is all that stuff we're just going to put it into a bucket and apply more of it to the larger jobs based on this kind of ratio analysis then we're going to go here and do the same thing we're going to say this equals the 900 times 1.6 so the factory overhead is 1440 of course it's lower because the direct labor is lower and it has nothing to do with the direct labor factory overhead does not but the direct labor is just being used to see how big one job is compared to the other so then we're going to go over here and do the same thing for job b17 equals the direct labor times 1.6 and we're going to be here in a in 19 equals the 850 times 1.6 and then we'll do the same for b19 equals 690 times 1.6 okay so there's our there's our information now note that this this could be done with direct labor we could use some other type of activity base we use the the cost direct labor cost we could use hours direct labor hours rather than uh rather than the dollar amount we could use uh some type of materials direct materials we uh and use that as the activity base and do this calculation based on uh on the direct materials whatever we think would be the best driver for us to say how much should of the overhead should be applied to one job versus the other how big is one job versus the other that's what we're going to basically be using in order to allocate this out okay so given that then um that's what we're going to apply on a job by job basis now let's go back to our journal entry the journal entry that we're going to make is going to be taking it out of factory overhead and putting it into work and process because we know which jobs are going to be used at this time so our journal entry then it's going to be work and process debit it has a debit balance we're going to make it increased by doing the same thing to it another debit so i'm going to right click and copy work and process and b22 right click and paste one two three and it's going to come out of factory overhead so factory overhead this number is going to go down j11 i'm going to right click and copy put that in b23 right click and paste one two three now you might think it should be that 7100 that's in there but remember that's just an estimate and we may be doing this as we go so we don't even know what the total number will be at the end of the month and and it's not going to be exact because we're estimating here so we don't we don't know what it's going to be off for sure so there's a couple ways we can we can do this we can say okay the direct labor so far for each job is 4200 so we can go here it's going to be equal 4200 times 1.6 which is uh 6720 that should be the debit and the credit we can also of course go to the job sheets and say what what did we do in the jobs well we took all of these direct labor numbers let's just do it with excel it's going to be this number i'm holding down control highlighting this number this number this number and this number adds up to 6720 so that's what we're using so i'm going to and of course it's the same number because it's just a ratio so if we add up all the totals here and multiplied at times 1.6 we'll get the we'll get the same number so we'll go all the way to the left again so there's going to be our journal entry so let's post this out down here's the work in process here's work in process so it's like uh what is that the fourth account so we're going to go to work in process we can now post it to work in process because it's now supported by the job accounts so we're in s11 equals going to scroll back down to that 6720 and enter that brings the balance from 6430 up by 6720 to the 13150 and that then or this number is being used to create the trial balance we're out of balance by 6720 then we're going to record the other side the factory overhead here's factory overhead it's going down this time so it's here and it's down here on our trial balance so we want to credit this time so we're in t29 we're going to say this equals we're going to this credit in d23 it's going to bring this 7100 down by 6720 to 380 and again it's not exact you'll notice it's off a little bit because we're at the end of the month right now those are all our jobs for the month it's still not exact because we had to we had to use an estimate so and that's fine we're going to say that's okay and uh that should put us back in balance in here brings the factory overhead down work in process now having that account still no effect on net income because we haven't uh sold anything yet all we're doing is shuffling the stuff around in the inventory accounts and now the work in process here is supported so we we moved it out of factory overhead up to here using an estimate and when we so did we can back this up by the by the detail in the general ledger and we can also support it with the jobs so the jobs now being basically complete in that they have direct labor or direct materials direct labor and factory overhead if we add up all the jobs they they are consistent these jobs including direct materials direct labor and overhead for each that of course ties out to what's on the trial balance so the trial balance number is now supported not only by the gl account but also by the subsidiary account in a similar way as the as the accounts receivable is not only supported by the gl account but a subsidiary account by customer the work in process is count is not only supported by the gl account but by a subsidiary account by jobs