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“This video. We re going to discuss the adjusted allocation rate approach. So this is is a method for dealing with and disposing of any over or under applied manufacturing balance. If you remember there s a difference between the actual and the applied amount of manufacturing overhead and we have a several things that we can do with that one is we could just close out the balance to cost a good soul just bury it.
There. Another is we could actually prorate the balance the under or over applied balance among work in process inventory finished goods inventory and cost a good sold okay so we could do either of those approaches. But it actually is the third approach. Where you can actually go back.
So some of you use job order costing and your actual manufacturing overhead exceeds. What your applied was and you say okay we didn t apply enough manufacturing overhead. Let s go back to each and every job now that we know what the actual manufacturing overhead rate is let s go back to each job and use that actual rate. So that we make an adjustment.
There so no longer we have and it kind of over under applied balance alright. So let me show you an example of how this works..
So. Let s say. We ve got a job here job 235. It s still in process has not been completed and we ve got so far direct materials used a 500 direct labor incurred of three hundred dollars and then we ve applied 1000.
Of manufacturing overhead how did we apply this thousand dollars of manufacturing overhead well if you remember we calculate a predetermined overhead rate so for this company let s say that the predetermined overhead rate was twenty dollars the way i got that as i said okay maybe for this company they budgeted they budgeted manufacturing overhead of eight hundred thousand dollars okay they budgeted for eight hundred thousand and they budgeted they were gonna apply manufacturing overhead on the basis of direct labor hours and so they thought there d be forty thousand direct labor hours. So that comes out to a rate of twenty dollars per direct labor hour and let s assume this job at 50 direct labor hours. So fifty times. Twenty is a thousand okay and then we get to a total cost for the job of eighteen hundred dollars.
Now let s say it s the end of the period. And we say you know what we made a mistake because actually the the act manufacturing overhead was a lot more than what was budgeted it ended up being. 12 million dollars instead of 800000. And let s just assume for purposes of simplicity.
That the direct labor hours. The actual amount was the same as the budgeted amount so we ll just change one thing here..
There s more actual manufacturing overhead. So if actual is higher than the amount that was applied that means that we didn t apply enough manufacturing. Overhead because our rate based on the actual if we take. 12.
Million divided by 40000. It s 30 at direct labor. Hour so 30 times. 50 that would be 1500.
So. If we were gonna go back. And we say okay we didn t apply enough before we had thousand of manufacturing overhead applied. Which was the 20 times.
50 but now we have 30 times. 50 which gives us 1500..
That s the amount of manufacturing overhead. That should have been applied so then our total cost for this job would be 2300. So far and as i mentioned in this example. The job is still in process.
But the total cost before was 1800 and now it s 2300 now. How do we think about this in terms of journal entries again in this example. I said okay we re assuming that this job is still in process. So the journal entry you could make the adjusting journal entry to make all this work is you could credit manufacturing overhead for five hundred dollars.
Because normally when you apply manufacturing overhead. You credit manufacturing overhead so you credit. It for that five hundred dollars that was under applied and then you debit work in process inventory for five hundred dollars remember that s an asset now if if i told you if i said you know actually this job 2 35. It s already been completed it s no longer in process.
It s already been completed then in that case you could you still have the same journal entry but you would say you debit finished goods inventory finished goods inventory would be debited for five hundred and manufacturing overhead would be credited for five hundred think about it like this you didn t apply enough manufacturing overhead. It s under applied..
So you re basically just going back and fixing it you re going back to the job. And saying. Hey we didn t apply enough. Let s put in an extra five hundred dollars and now all in a final example.
Now. Let s say that this was not a finished good. So wasn t no longer in process. And it wasn t a finished good either because it already went through finish good and you sold it in that case.
You would debit cost of goods sold for 500 and then credit manufacturing overhead. So the idea is this you go back to this job. And you say. Okay what should have happened here what we should have applied 1500 of manufacturing overhead because based on what we actually do the actual rate.
This is the amount that should have been applied and then you say okay was this job still in process is it finished good or is it something that we finished and sold and if so then you adjust whichever account wipp inventory finished goods inventory or cost of goods sold ” ..
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