 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, 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 net 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. 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 and process because we couldn't support it by the job cost sheets. 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. 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. We're going to just give it to us here which is going to be 1.6 of the direct labor. 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 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 that was our task, just to go through this 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 to 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 till the end of the month to know what's in there 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 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 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 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 in overhead at the end of the month we couldn't apply them to the jobs evenly because the jobs are different sizes 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 assume more overhead then should be applied to it. So we're going to use direct labor as 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're going to 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 1.6 so we're going to think that you know 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