 In this presentation we will take a look at overhead costs. First we want to take a look at the process for overhead. The process of recording overhead. The process of allocating overhead to jobs. It being a bit more complex than the allocation of direct labor. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as excel practice problems pdf files and more like quickbooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. And direct materials. First we're going to set up a predetermined overhead rate. We'll talk more about the process for doing that but this predetermined overhead rate will help us to assign what's in overhead to particular jobs. It'll help us move from overhead to particular jobs. We need to do it at the beginning of the process so that we can then use it in order to allocate overhead to jobs as we go through the current time period. We're then going to record actual overhead. Actual overhead that we have during the process. Remember what actual overhead is. It's going to be the cost of anything that we can't apply to a job. So anything related to the manufacturing process that we cannot apply directly to a job in direct materials in direct labor anything related to the warehouse that we can't apply directly to a job like depreciation like like utilities on the warehouse. Then we're going to put that into overhead. Then we're going to apply estimated overhead to specific jobs. Now note that these two may not be going in order. In other words as we go through a time period we're going to be incurring overhead as we go. Meaning we're going to be paying for stuff. We're going to be paying the utility bill in the factory. We're going to be paying employees that are in direct employees that we can't apply to a particular job as we go. And we're also going to be applying the estimated overhead to jobs as we go. So this we may apply overhead to a job before we record all the overhead for a time period. If we're talking about a month then we may be applying some overhead to the job of course before all the overhead is recorded because the month isn't over. We're going to be incurring overhead through the entire process. We're going to be applying overhead through the entire process. What we want to do is set up the predetermined overhead rate so that whenever we need to apply we can do so. And that is not necessarily dependent on whether we have recorded you know the actual overhead or all of it for a certain time period. And then we're going to have to adjust the over or under applied overhead. So as we'll see the estimate this is going to be an estimate for us to apply the overhead to the jobs. It's not going to match our actual amount and overhead the actual cost that we have and therefore we will have a difference which will be under or over applied which will have to do something with just to deal with that estimate at the end of the time period. So here's going to be the process that we will go through. So first let's think about the costs that we'll be dealing with. And note I'm going to do this a little bit out of order because the costs that we deal with are going to be recording the actual costs will go together and although we do this at the beginning it's going to be applied directly to this process as applying out the overhead. So first I'm going to think about the actual costs because that's probably how you would think about how we would think about what would happen in terms of a GL account. We're going to have costs that will be incurred. We need to then allocate those costs to particular jobs. First we'll think about materials. Now we're considering here the indirect materials. We've already looked at this at a prior presentation but we want to just recap it here so that we know that here as we focus in on the overhead component we see it here as well. When we think about the materials leading the materials account and going somewhere else somewhere towards production, once we start working on stuff you would think we want to apply it to a particular job and this is going to be direct materials things that we said hey we want you know this wood if we're making guitars and we want to apply it to this particular job and that's why. But if we have other materials such as indirect materials like glue or something like that that we're just going to take the we're just going to say hey the warehouse needs more glue so all the so we can work on more guitars then we're just going to put that in the middle of the warehouse and we're not going to assign it to to all these guitars we don't know which one which job it's going to be working on. So this account then it's going to be indirect so remember we could have two accounts up here. Raw materials we might try to track them differently. We might try to track the direct materials and then have another account for indirect or we might just group them all into raw materials and then once we take them out we reduce raw materials as we'll do here and we'll record the ones that we cannot assign to a particular job we don't have a requisition form it's just a request from the warehouse in general or from the from the production department the factory in general then we'll apply it to overhead so to look something like this we'll say that the factory overhead is what we're going to apply to and then the raw materials is going down. So raw materials will be decreased but we're not putting into work and process because we don't know which job therefore it has to go into the factory overhead. So it'll look like this we're focusing on this journal entry factory overhead is increasing going from zero up by 550 to 550 and the other side is bringing down raw materials which was at 14770 down by the the 552 147 220 so that's this account and this account we moved it for raw materials not to work and process yet we didn't know which job we had to move it first to the factory overhead we're starting to build up this account and that's why i'm doing this first we can see what's actually in there and then we'll apply it out so we're gonna say okay now there's 550 in there i want it where do we want it eventually we want to eventually put it there i just don't know how because we cannot do that until we know which job to assign it to so then we the same thing was with direct labor we already recorded this but i just want to record it again just so we know where it is in terms of the overhead so direct labor if we're applying the timesheets these are all timesheets that people that work in the warehouse and work in the production in the factory but these we can apply to a particular job this is stuff that's in payroll that we could not apply to a particular job so it's like the supervisor salary the maintenance anything that's in there that's not working on a particular guitar in our case we don't know which person which guitar to apply it to it's going to apply to some of them but we don't know which so if we could apply them this is part of the payroll that we applied up here we're focusing in on this item that we cannot apply and that's going to be going into factory overhead and credit wages payable so again this is like a payroll this is like the payroll journal entry you know we're paying someone payroll we're not dealing with all the all the others withholdings and whatnot here we're just going to say this is straight simplified payroll journal entry we're going to credit wages payable you can think of cash if we were credited in cash for paying somebody and we're debiting factory overhead because they worked on the guitars they worked on the jobs but we don't know which one so we couldn't put it in the working process so that brings us to this point now we have 1750 and you can and you can note as we build up this factory overhead account we don't exactly know what it's comprised of it's comprised of all these different things now we've got some indirect materials and some indirect labor that we are putting into this account eventually we wanted to go into work and process again but we don't know which job to apply it to and that's going to be our problem we'll have to deal with then we're going to have all the other stuff all the other stuff that it's going to be included in the production of inventory that we don't know exactly which job it goes to in other words we're going to have indirect materials indirect labor and then we typically look at everything else that's not going to be part of materials and labor and that's going to include anything that has to do with the factory so in a book problem anything that refers to the factory will typically be going to overhead as opposed to work and process and anything involved in the factory as opposed to the administrative office we can think of the two buildings being separate then we'll be we'll be applied of course to the factory overhead as opposed to being a period cost being a cost that we're going to apply to just just expensing it typically and these are the ones that actually can be kind of confusing because again all the stuff that we apply to overhead right now are stuff that we often think of as expenses all the stuff that we're talking about really direct material when we think about materials especially when we think about wages we often think of these are kind of expenses we think of the debit side as being expenses typically but that's really because of the matching principle not just the nature of wages or the nature of the thing so in this case we're going to pick up anything that's going to be involved in the factory we're going to include it in the inventory but not to a particular job and therefore not to work and process but to factory overhead so if we had depreciation on the factory on a factory equipment we're going to say okay depreciation what's normally the journal entry for depreciation normally we credit depreciation expense and credit accumulated depreciation and this time however we're going to credit accumulated depreciation still but debit factory overhead now that probably looks really weird to many you know when we first look at that and we've just probably memorized the journal entry that says depreciation is always recorded as a debit to depreciation expense a credit to accumulated depreciation and that's going to be recorded in the decrease in the factory equipment and the and the use that we've had over time but why is that the case because usually the expense down here represents that we consume something in order to help generate revenue in that time period we're allocating the cost of the equipment to when we used it consumed it in this case we used it but we didn't use it to help generate revenue we used it to make inventory an asset so therefore we're kind of capitalizing we're moving the use of that equipment to the cost of the asset we will expense it when we'll expense it when we finally sell the inventory in the form of cost to get sold so it's going to move to factory overhead it's going to move to raw material it's going to move to work in process and then finally to finished goods and then we're going to finally sell it that's when we'll have it and then anything else like rent if it's rent on the factory or utilities on the factory or insurance on the factory these are all things that we might think typically we think of you know an expense that we would have here if it was rent expense if it was rent on the office building and not the factory then it would be an expense but here it's going to be something that is on the building so on the on the factory and therefore overhead so this is where book problems often will kind of make up an account instead of just paying something like the utilities bill they might make up an account called like payable utilities payable just to show us that just through the journal entry that this deals with utilities that's why they're doing it but in practice usually we would just pay cash so in essence if we if we add these up our journal entries basically 1006 plus the 250 plus the 1000 that's going to add up to 2850 that's how much cash we're paying again we probably pay with three separate checks here but we're basically crediting cash for that amount and then the debit we would normally think well the debit should go to rents pay our rent expense utilities expense and again if it was monthly to insurance expense or prepaid insurance here we're going to say no we're paying these not in order to help generate sales in the current period we're hoping it's going to help generate sales but not until we sell the inventory sometime in the future and therefore the debit's going to go to factory overhead so we're going to put this in the factory overhead and again it's going to it's going to go up here we are going to expense it but not in the form of we're never going to see utilities expense on the factory because the utilities expense is included in the inventory and when we expense it it'll be in the form of cost of good sold which is an expense not in the form of utilities expense so any utilities we pay on the administrative office will expense them because we use the administrative office in order to help us generate revenue it's a period cost any utilities expense on the factory however is going to be part of the inventory which we'll put in the factory overhead we're going to allocate finally to work in process we'll finish that inventory and then we'll sell it expensing it in the form of cost of good sold so if we look at these journal entries then we're going to debit factory overhead here's factory overhead it was at 1,750 we're going to increase it by 2,500 to 4,250 but we're going to credit accumulated depreciation which was at 1,053 crediting it making the the contra asset account the credit balance account go up by 2,500 to 1,055 500 that's what's on the trial balance then we're going to debit factory overhead by the 2,850 so here's the 2,850 so the 4,750 going up by 2,850 to 7,100 that being represented on the trial balance and then the cash is going down from 4,8000 by 2,850 to 450,150 and that is going to be what's on the trial balance so in essence we're recording these which again normally we would think of as kind of expense type of transactions if it was a service company or a merchandising company but because it's on the warehouse all this I mean not on the warehouse on the factory because it's part of the factory process it's going to be included in an asset capitalized as an asset first in factory overhead because we don't know which job to post it to we don't know where to post to and job if we did it would go to work and process but we don't know which job it to apply it to so we're going to first put it into this bucket so this bucket now factory overhead has all this stuff in it everything we think that should be included in the cost of inventory but we don't know which inventory everything that should have been included in the cost of a guitar the cost of a construction job but we don't know which construction job is here then we're going to allocate it some way so we're going to have to use some basis to allocate this out and how how are we going to do that what why can't we just allocate it evenly because we have goods that are not the same all of our stuff is different if we have construction jobs all the jobs are different sizes wouldn't be proper to allocate you know this cost evenly to the jobs because all the jobs are going to be different so we have to basically estimate how much to allocate and that's going to be our future project