Chapter 4. Accounting for Factory Overhead

Chapter 4. Accounting for Factory Overhead

1. Factory overhead includes

   • indirect materials consumed in the factory
     • used for maintaining factory equipment
   • indirect factory labor
     • overtime premiums paid to all factory workers
   • all other indirect manufacturing expenses

2. Identifying Cost Behavior Patterns

   • Variable costs
   • fixed costs
   • Semi Variable costs/called mixed costs
   • step-variable cost
   • step-fixed cost

3. Analyzing Semivariable Factory Overhead Costs

   • The observation method/ the account analysis method
   • High-Low Method
   • Scattergraph Method

4. Accounting for Actual Factory Overhead

   • Factory overhead ledger
     • The subsidiary ledger is known as the factory overhead ledger, and the control account is entitled ‘‘Factory Overhead’’ or ‘‘Manufacturing Overhead.’’
   • factory overhead analysis spreadsheet
   • expense-type analysis spreadsheet
   • department-type analysis spreadsheet
   • schedule of fixed costs
     • By referring to the schedule at the end of the period, a journal entry can be prepared to record the total for each of the fixed costs
   • General factory overhead expenses
   • summary of factory overhead
     • This summary shows the items of expense by department and in total.

5. Distributing Service Department Expenses

   • service department
   • production department
   • Direct charge
   • Direct distribution method
     • Distributes service department costs only to production departments, even though the service departments perform services for other service departments
   • The sequential distribution or step-down method
     • Distributes service department costs regressively to other service departments and then to production departments
   • Algebraic distribution method

6. Distributing Service Department Expenses

   • service department
     • is an essential part of the organization, but it does not work directly on the product
   • production department
     • performs the actual manufacturing operations that physically change the units being processed
   • Direct charge
     • If the power used in each department is metered, the meters can be read at the end of the period and the departments charged for the exact amount of power used
   • Direct distribution method
   • The sequential distribution or step-down method
     • Distributes service department costs regressively to other service departments and then to production departments
   • Algebraic distribution method
     • Takes into consideration that some service departments not only may provide service to, but also may receive service from, other service departments

7. Applying Factory Overhead to Production

   • The direct labor cost
   • The direct labor hour
   • Machine hour method

8. Accounting for Actual and Applied Factory Overhead

   • period cost
   • product cost