 In this presentation we will take a look at overhead costs. In a prior presentation we looked at the cost flow of inventories starting with the raw materials as it flows through to finished goods and is finally sold and recorded as an expense. 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. In the format of cost of goods sold within that process within the recording of inventory we note that there's three main parts we have the direct materials we've got the direct labor and then the overhead the overhead we saw that was going to have the actual overhead that will accumulate upward and then we're going to apply out the overhead to the department. So the idea of the overhead then is this area that we don't know which department to apply them to therefore we put something into overhead and then we apply it out to the appropriate location based on some type of estimate in this presentation will consider some of the items that would be increasing or the actual costs of overhead the overhead that would then increase and we apply that overhead out based on an estimate. So note that the amount that we apply out will not match the actual overhead per se and therefore this process will probably result in an under or over applied overhead amount that we'll have to process out and we'll discuss how to do that in a future presentation here. We're concentrating on the actual manufacturing overhead. When considering the accounting for overhead there's a few steps we want to keep in mind. The first is that we're going to set up a predetermined overhead rate. The predetermined overhead rate will typically be based on prior performance or on the last time period the last month and then account for any adjustments in order to get the current predetermined overhead rate. We're going to use that rate to be able to apply the overhead out to the proper location to the proper department. We'll actually do the predetermined overhead rate last so we can see what kind of things would be in overhead so that we can determine how we would then calculate the predetermined overhead rate and then we're going to record actual overhead. So we'll actually enter the overhead or the overhead that will be incurred throughout the month. This is not an estimate. We don't have to estimate what the actual overhead is. The reason we need to put it in the overhead and not to a particular process is because it's not because we don't know what the overhead amount is. We're going to have that actual amount but we don't know which process to apply it to and there might be some timing issues as well as to when we should apply them out. And then we're going to apply the estimated overhead to the process. So we're going to use some type of rate to apply out the estimated overhead to the proper process. So the actual overhead will typically differ from the estimated overhead. And again, part of that might be due to timing. In other words, we have it set up here so we're going to have all the actual overhead calculated and then apply out the estimate. And that might not happen exactly in that order, which is the reason we need the estimate in the first place. We might use the estimate in the first place and therefore be able. We won't have an exact matchup between the actual overhead incurred and the estimated overhead. And then we're going to have the adjust the over or under applied overhead. So at the end of this process, we could have overhead that was either under or over applied. We'll have to do something with that because we want to make sure that it's all applied out so we can go through this process again in the next time period. So what we're going to do is we're going to set up the predetermined overhead rate. The predetermined overhead rate will help us to apply the overhead to the appropriate department as we go through. We're going to record the actual overhead that we incur during the time period. We'll discuss here what those components will be. And then we're going to apply out, of course, to the proper department based on our predetermined overhead rate, which is an estimate. These two will not be the same and therefore we'll have an over or under applied amount and we'll have to adjust for that and that'll be the final step. Here we'll be considering what kind of things are going to be included in overhead. So we could have in factory overhead anything that you see in a book problem that has depreciate has factory in it. Mainly if we can't apply it directly to the department will typically be in overhead. So factory depreciation, for example, if it's for the full factory and we don't we can't apply it out directly to the department. We're just going to dump it into overhead and then apply to department using the predetermined overhead rate. And it might look something like this. We're going to debit the factory overhead and we're going to credit the accumulated depreciation. So note this is very similar to a depreciation journal entry we would normally have. You might have just memorized this journal entry for depreciation debit depreciation expense and credit accumulated depreciation. Now this is going to be different because we're not the depreciation is not expensed in that time period. It's being used to create inventory. That's why we're putting it into overhead, which will eventually go into the working process and into inventory, which we will expense but in the format of cost of goods sold, not in the format of depreciation. So this will then increase the overhead. So overhead will go up from zero up in a debit to 50 with this debit up top accumulated depreciation. Then credit balance contra asset count was that 50 goes up by 50 to 100. There's the 100. Here's the equipment. It's it's going down in a book value method because the contra account is going up. And so that is the difference between those two would then be the book value. And then we've got the factory overhead, the factory overhead now at our 50. Next item, factory utilities. So we might have utilities. Again, utilities, we've probably memorized a utilities journal entry to be utilities expense, and credit cash or something like that. But in this case, it's utilities on the factory where we make inventory. And therefore we're not going to expense the utilities as utilities expense, but put it into the inventory in the form of factory overhead, which will then be part of a finished goods inventory, which we will expense in the form of cost of goods sold eventually at the point of sale. And then the other side, we're going to put into accounts payable. We haven't yet paid it in this case. Accounts payable going up factory overhead then increasing by the 28,000 from 50 plus the 28 to the 78. Here it is here. So that's this 20,000 we're posting out to the GL. And then the 28 for the accounts payable increasing. It was at 965 by the 28 to 993. So there's going to be our 993 on the trial balance. You'll note that the bucket of factory overhead is pretty random. We got some random stuff here. So now we've got utilities. We had depreciation. And next item is going to be indirect materials. When we consider materials, note that a lot of the materials we take, we will know which department it goes to. And therefore we'll apply that out to the department. We'll apply it out to whatever work in process department it should go to, whether in this case it'd be A or B. But we would apply that out to the work in process. It's the indirect materials that we don't know where it should go. Right. We don't know which department it should go to. If it's indirect. So if it's indirect, small materials possibly, therefore we're going to dump that once again into factory overhead. So factory overhead then debit increased by the 68. And the raw materials would decrease by the 68. So we're decreasing the raw materials, putting it into the factory overhead. If we took a look at the GL accounts, then we have our factory overhead. It's going to go up by the 68 to 146. So here's our 146 now. And then the raw materials are going to go down from the 153.5 by the 68 to the 85.5. And so the 85.5 is here. We took it out of one inventory, put it into another, not directly into work in process. We couldn't put it there. We don't know which job it or which process to go to. And therefore put it into factory overhead, which we will then apply out using some format of estimate. Labor is the same way. If we have labor and we know where it's going to go, we can then put it right to the work in process. If we know which department to put it to, we can debit work in process and credit the factory payroll. Note when we consider wages, we're typically thinking of processing payroll. We're thinking about kind of, this is a payroll process. We're not getting into any kind of payroll taxes or that kind of complicated stuff. But just note that this would be on the most basic level to pay payroll. We would debit payroll expense normally and credit cash to pay payroll. That would be the most big, there's a bunch of other things with holdings and whatnot. But that would be the normal journal entry. We hear instead of debiting the expense, once again, we're going to be putting it into the inventory. If we knew which department it should go to, we can put it directly into the work in process. That's going to be the direct labor. Indirect labor, what we're concentrating on here, means we don't know which department to put it into. We're paying people that might be working in both departments and therefore we're going to put it into the factory overhead. So rather than expenses, no matter which way it goes, whether it be direct or indirect, it's kind of like running payroll. We're processing the payroll journal entry, but instead of expensing it at that point in time, we're capitalizing it at inventory in one way or the other, either in work in process or factory overhead. The other side being cash or in this case, usually in these problems, they're going to put it into a payable account because note what the payable account does. It allows us not to have a description and still know kind of what this journal entry is doing. If I just put cash down here, then I won't know really just by the looking at the journal entry that what this was for. If I say it's a payable that we haven't paid yet, then even without a description, I could say, oh, well, that looks like it's went into overhead because it's indirect labor just by the accounts that are going to be affected here. So if we look at the GL then, we were at 146 for the factory overhead. It's going to go up by 790 to 936. So here's the 936 in factory overhead. Payroll was at 780,000. It went up by 790 to 1,570. So those are payroll. There's our liability. So these are just a few items that can be in factory overhead. Notice that there could be a lot of different things in there and typically it's going to be anything that's basically on the factory that again, we couldn't apply to a particular process. Once we have this into the factory overhead, you can see we have this debit balance here. We want it eventually to go to work in process. So we're going to have to do that in some way. We'll do it with an estimate. The estimate won't use exactly this number. It's going to be based on estimates basically on prior year estimates with some kind of format for us to apply it out based on an estimate. And therefore, when we do apply it out, it's probably not going to be exact. And if it's not, we'll have an over or under applied amount which we'll have to adjust out. So those are going to be the steps we need to do going forward with relation to the factory overhead.