CB2101

Topic 2:
Job-Order Costing

1
 2-2

Job-Order Costing:
Calculating Unit Product Costs

Chapter 2
 2-3

Job-Order Costing: An Overview

(1 of 2)
Job-order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order. Many service industries
use job-order costing.
3. The unique nature of each order requires tracing and allocating
costs to each job, and maintaining cost records for each job.

 Whereas process costing systems are used when a single

(uniform) product is produced each period
(e.g., cereals, paper towels etc.) → Chapter 5
 2-4

Job-Order Costing: An Overview

(2 of 2)

Examples of firms that would use job-order costing

1. Boeing (aircraft manufacturing)
2. Bechtel International (large scale construction)
3. Walt Disney Studios (movie production)
 2-5

Job-Order Costing – Cost Flow 1

Direct Costs
Charge direct
Direct Materials Trace
Job No. 1 material and
direct labor
Direct Labor costs to each
Job No. 2
job as work is
Job No. 3 performed.
 2-6

Job-Order Costing – Cost Flow 2

Manufacturing
Direct Costs
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
Indirect Costs are allocated to
Manufacturing all jobs rather
Job No. 3
Overhead Allocate than directly
traced to each
job.
 2-7

Let’s
look at an
example
 2-8

Job Costing System at Burger King

The “job” at Burger King is an individual burger.

• Direct Materials: • Manufacturing Overhead:

• Meat • Utilities
• Bread • Indirect labor
• Cheese • Store manager’s wage
• …
• Indirect materials
• Direct Labor: • Cleaning supplies
• Wages of workers who make • …
the burger
• Store manager’s wage (X)
 2-9

The Job Cost Sheet

 2-10

Measuring Direct Materials Cost – Part 1

 2-11

Measuring Direct Materials Cost – Part 2

 2-12

Measuring Direct Labor Costs

 2-13

Job-Order Cost Accounting

 2-14

Learning Objective 1

Compute a predetermined
overhead rate.
 2-15

Allocation of Overhead Costs

When the overhead costs such as utilities were incurred,
it is difficult to trace to particular jobs. So we create a
temporary account “Manufacturing Overhead” to
accumulate the actual costs. Then we allocate the
overhead costs to individual jobs using some systematic
method. The process is called overhead application.

Mfg. Overhead
Actual Applied
 2-16

Why Use an Allocation Base?

An allocation base, such as direct labor-hours, direct
labor-dollars, or machine-hours, is used to assign
manufacturing overhead to individual jobs.

We use an allocation base because:

a. It is impossible or difficult to trace overhead costs to particular jobs.
b. Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
c. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
 2-17

Manufacturing Overhead Application

The predetermined overhead rate (POHR) used to apply
overhead to jobs is determined before the period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.
 2-18

The Need for a POHR

Predetermined overhead rates that rely upon

estimated data are often used because:
1. Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2. Actual overhead costs can fluctuate seasonally,
thus misleading decision makers.
 2-19

Computing Predetermined Overhead Rates

(1 of 2)
The predetermined overhead rate is computed before the
period begins using a four-step process.

1. Estimate the total amount of the allocation base (the

denominator) that will be required for next period’s
estimated level of production.

2. Estimate the total fixed manufacturing overhead cost for

the coming period and the variable manufacturing
overhead cost per unit of the allocation base.
 2-20

Computing Predetermined Overhead Rates

(2 of 2)

3. Use the following equation to estimate the total amount

of manufacturing overhead:

Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.

𝑌
4. Compute the predetermined overhead rate =
𝑋
 2-21

Learning Objective 2

Apply overhead cost to jobs

using a predetermined
overhead rate.
 2-22

Overhead Application Rate

Yost Precision Machining estimates that it will require 40,000 direct labor-
hours to meet the coming period’s estimated production level. In addition,
the company estimates total fixed manufacturing overhead at $640,000, and
variable manufacturing overhead costs of $4.00 per direct labor hour.
Y = a + bX
Y = $640,000 + ($4.00 per direct labor-hour × 40,000 direct labor-hours)
Y = $640,000 + $160,000
Y = $800,000

$800,000 estimated total manufacturing overhead

POHR =
40,000 estimated direct labor hours (DLH)

POHR = $20.00 per direct labor-hour

 2-23

Recording Manufacturing Overhead

 2-24

Learning Objective 3

Compute the total cost and

the unit product cost of a job
using a plantwide
predetermined overhead rate.
 2-25

Calculating Total Cost of Job

 2-26

Calculating Unit Product Cost

 2-27

Concept Check 1

Job WR53 at NW Fab, Inc. required $200 of direct

materials and 10 direct labor-hours at $15 per hour.
Estimated total overhead for the year was $760,000 and
estimated direct-labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
 2-28

Job-Order Costing – A Managerial

Perspective – Part 1
Inaccurately assigning manufacturing costs to
jobs adversely influences planning and
decisions made by managers.
1. Job-order costing systems can accurately trace
direct materials and direct labor costs to jobs.
2. Job-order costing systems often fail to
accurately allocate the manufacturing overhead
costs used during the production process to
their respective jobs.
 2-29

Job-Order Costing – A Managerial

Perspective – Part 2
Choosing an Allocation Base
Job-order costing systems often use allocation bases that do not
reflect how jobs actually use overhead resources.
The allocation base in the predetermined overhead rate must
drive the overhead cost to improve job cost accuracy.
A cost driver is a factor that causes overhead costs.

Many companies use a single predetermined overhead rate, called a

plantwide overhead rate, to allocate all manufacturing overhead costs to
jobs based on their usage of direct-labor hours.
1. It is often incorrect to assume that direct-labor hours is a company’s
only manufacturing overhead cost driver.
2. If more than one overhead cost driver can be identified, job cost
accuracy is improved by using multiple predetermined overhead
rates.
 2-30

Learning Objective 4

Compute the total cost and

the unit product cost of a
job using multiple
predetermined overhead
rates.
 2-31

Information to Calculate Multiple

Predetermined Overhead Rates

Dickson Company has two production departments,

Milling and Assembly. The company uses a job-order
costing system and computes a predetermined
overhead rate in each production department. The
predetermined overhead rate in the Milling Department
is based on machine-hours and in the Assembly
Department it is based on direct labor-hours. The
company uses cost-plus pricing (and a markup
percentage of 75% of total manufacturing cost) to
establish selling prices for all of its jobs. At the
beginning of the year, the company made the following
estimates:
 2-32

Information to Calculate Multiple

Predetermined Overhead Rates

Milling Assembly
Department Department

Machine-hours 60,000 3,000

Direct labor-hours 8,000 80,000

Total fixed manufacturing overhead cost $ 390,000 $ 500,000

Variable manufacturing overhead per machine-hour $ 2.00 –

Variable manufacturing overhead per direct labor-

– $ 3.75
hour
 2-33

Step 1 – Calculate the Predetermined

Overhead Cost for Each Department

During the current month the company started

and completed Job 407. It wants to use its
predetermined departmental overhead cost and
rate for the Milling and Assembly Departments.
 Milling Department = $390,000 + ($2.00 per
MH × 60,000 MHs) = $510,000
 Assembly Department = $500,000 + ($3.75
per DLH × 80,000 DLHs) = $800,000
 2-34

Step 2 – Calculate the Predetermined

Overhead Rate for Each Department

Use the amounts determined on the previous slide

to calculate the predetermined overhead rate
(POHR) of each department.
• Milling Department = $510,000 ÷ 60,000 MHs =
$8.50 per MH
• Assembly Department = $800,000 ÷ 80,000
DLHs = $10.00 per DLH
 2-35

Step 3 – Calculate the Amount of

Overhead Applied from Both
Departments to a Job
Use the POHR calculated on the previous slide to determine
the overhead applied from both departments to Job 407:

Department
Job 407
Milling Assembly
Machine-hours 90 4
Direct labor-hours 5 20
Direct materials $ 800 $ 370
Direct labor cost $ 70 $ 280

Milling Department = 90 MHs × $8.50 per MH = $765

Assembly Department = 20 DLHs × $10 per DLH = $200
 2-36

Step 4 – Calculate the Total Job Cost

for Job 407

We can use the information given to calculate the

amount of the total cost of Job 407. Here is the
calculation:
Milling Assembly Total
Direct materials $ 800 $ 370 $ 1,170
Direct labor $ 70 $ 280 350
Manufacturing overhead applied $ 765 $ 200 965
Total cost of Job 407 $ 2,485
 2-37

Step 5 – Calculate the Selling

Price for Job 407
(1 of 2)

Here is the selling price of Job 407 assuming a

75% markup:

Total cost of Job 407 $ 2,485.00

Markup ($2,485 × 75%) 1,863.75
Selling price of Job 407 $ 4,348.75
 2-38

Step 5 – Calculate the Selling Price for Job

407 (2 of 2)
• It is important to emphasize that using a
departmental approach to overhead application
results in a different selling price for Job 407 than
would have been derived using a plantwide overhead
rate based on either direct labor-hours or machine-
hours.
• The appeal of using predetermined departmental
overhead rates is that they presumably provide a
more accurate accounting of the costs caused by
jobs, which in turn, should enhance management
planning and decision making.
 2-39

Multiple Predetermined Overhead Rates—An

Activity-Based Approach

• When a company creates overhead rates based on the

activities that it performs, it is employing an approach
called activity-based costing.

Activity-based costing is an alternative approach to

developing multiple predetermined overhead rates.
Managers use activity-based costing systems to more
accurately measure the demands that jobs, products,
customers, and other cost objects make on overhead
resources.
 2-40

Job-Order Costing in Service Companies

Although our attention has focused upon

manufacturing applications, it bears re-emphasizing
that job-order costing is also used in service
industries. Job-order costing is used in many different
types of service companies.
Examples include law firms, accounting firms, and
medical treatment.
 2-41

Job-Order Costing:
Cost Flows and External
Reporting
Chapter 3
 2-42

Learning Objectives 1 and 2

Understand the flow of costs in the job-

order costing system and prepare
appropriate journal entries to record
costs.

Use T-accounts to show the flow of costs

in a job-order costing system.
 2-43

Flow of Costs: Key Definitions

1. Raw materials include any materials that go into the

final product.
2. Work in process consists of units of production that
are only partially complete and will require further
work before they are ready for sale to customers.
3. Finished goods consist of completed units of product
that have not been sold to customers.
4. Cost of goods manufactured include the
manufacturing costs associated with the goods that
were finished during the period.
 2-44

Flow of Costs: a Conceptual Overview

 2-45

Accounting for Stock Variable (e.g. Raw Materials,

Work in Process, Finished Goods)

•Basic equation:
•Beginning balance + inflow – outflow =
Ending balance

•Application: (Raw materials)

•Beg bal + purchases – raw materials used
(both direct and indirect) = End bal
 2-46

Accounting for Stock Variable (e.g. Raw Materials,

Work in Process, Finished Goods)

•Application: (Work in process)

•Beg bal + Total manufacturing costs (Direct
materials + Direct labor + Manufacturing
overhead*) – Cost of goods manufactured =
End bal
•* include indirect materials

•Application: (Finished goods)

•Beg bal + Cost of goods manufactured – Cost
of goods sold = End bal
 2-47

Job-Order Costing: The Flow of Costs

To illustrate the cost flows within a job-order costing system, we
will record Ruger Corporation’s transactions for the month of April.
Ruger is a producer of gold and silver commemorative medallions,
and it worked on only two jobs in April.
Job A, a special minting of 1,000 gold medallions commemorating
the invention of motion pictures, was started during March and
completed in April. As of March 31, Job A had been assigned
$30,000 in manufacturing costs, which corresponds with Ruger’s
Work in Process balance on April 1 of $30,000.
Job B, an order for 10,000 silver medallions commemorating the fall
of the Berlin Wall, was started in April and was incomplete at the
end of the month.
 2-48

Purchase of Raw Materials – T Accounts

Purchase of raw materials in T-account form.
Raw Materials Work in Process
Material Direct (Job Cost Sheet)
Purchases Materials Direct
Indirect
Materials
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
 2-49

Purchase of Raw Materials – Journal Entry

Purchase of raw materials in journal entry form -- On

April 1, Ruger Corporation had $7,000 in raw materials
on hand. During the month, the company purchased on
account an additional $60,000 in raw materials.

(1)
Raw Materials 60,000
Accounts Payable 60,000
 2-50

Issue of Direct and Indirect Materials

During April, materials requisition forms were prepared to
authorize withdrawing $52,000 in raw materials from the
storeroom for use in production. These raw materials
included $50,000 of direct and $2,000 of indirect
materials. Entry (2) records issuing the materials to the
production departments.

(2)
Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52,000
 2-51

Recording Labor Cost: T-Account

Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct
Direct
Labor
Materials
Indirect
Direct
Labor
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
 2-52

Recording Labor Cost: Journal Entry

In April, the employee time tickets (which provide

hourly summaries of each employee’s activities
throughout the day) included $60,000 recorded for
direct labor and $15,000 for indirect labor. The
following entry summarizes(3)these costs:
Work in Process 60,000
Manufacturing Overhead 15,000
Salaries and Wages Payable 75,000
 2-53

Recording Actual Manufacturing

Overhead Costs: T-Account
Salaries and Wages Payable Work in Process
(Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead
 2-54

Recording Actual Manufacturing Overhead

Costs: Journal Entry
Assume that Ruger Corporation incurred the following general
factory costs during April:
1. Utilities (heat, water, and power) $21,000
2. Rent on factory equipment $16,000
3. Miscellaneous factory overhead costs $3,000

(4)
Manufacturing Overhead 40,000
Accounts Payable* 40,000

*Accounts such as Cash may also be credited.

 2-55

Applying Manufacturing Overhead Costs

to Work in Process:
Salaries and Wages Payable
T-Account
Work in Process
(Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor
Overhead
Mfg. Overhead Applied

Actual Applied
Indirect Overhead
Materials Applied to Work If actual and applied manufacturing
Indirect in overhead
Labor Process are not equal,
a year-end adjustment
Other is required.
Overhead
 2-56

Applying Manufacturing Overhead Costs to

Work in Process: Journal Entry
Assume that Ruger Corporation’s predetermined overhead rate
is $6 per machine-hour. Also assume that during April, 10,000
machine-hours were worked on Job A and 5,000 machine-hours
were worked on Job B (a total of 15,000 machine-hours). Thus,
$90,000 in overhead cost ($6 per machine-hour × 15,000
machine-hours = $90,000) would be applied to Work in Process.
The following entry records the application of Manufacturing
Overhead to Work in Process:
(5)
Work in Process 90,000
Manufacturing Overhead 90,000
 2-57

Accounting for Nonmanufacturing Costs

Nonmanufacturing costs are not assigned
to individual jobs, rather they are
expensed in the period incurred.
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity are expensed
in the period incurred.
2. Advertising expenses are expensed
in the period incurred.
 2-58

Nonmanufacturing Costs
Ruger Corporation incurred $30,000 in selling and administrative salary costs
during April. The following entry summarizes the accrual of those salaries:
(6)

Depreciation on office equipment during April was $7,000. The entry is as

follows:
(7)

Advertising was $42,000 and other selling and administrative expenses in

April totaled $8,000. The following entry records these items:
(8)
 2-59

Transferring Completed Jobs from Work in

Process to Finished Goods: T-Account
Work in Process Finished Goods
(Job Cost Sheet)
Cost of
Direct Cost of Goods
Materials Goods Manufactured
Direct Manufactured
Labor
Overhead
Applied
 2-60

Transferring Completed Jobs from Work in

Process to Finished Goods: Journal Entry
Job A (was completed during April and Job B was incomplete at
the end of the month.
The following entry transfers the cost of Job A from Work in
Process to Finished Goods:
(9)
Finished Goods 158,000
Work in Process 158,000

Because Job B was not completed by the end of the month, its
assigned costs will remain in Work in Process and carry over to the
next month. If a balance sheet were prepared at the end of April,
the cost accumulated thus far on Job B ($72,000) would appear in
the asset account Work in Process.
 2-61

Transferring Finished Goods to Cost of Goods

Sold: T Account
Work in Process Finished Goods
(Job Cost Sheet)

Direct Cost of Cost of

Materials Cost of Goods Goods
Goods Mfd. Sold
Direct Mfd.
Labor
Overhead
Applied
Cost of Goods Sold

Cost of
Goods
Sold
 2-62

Transferring Finished Goods to Cost of

Goods Sold: Journal Entry
For Ruger Corporation, we will assume 750 of the 1,000 gold
medallions in Job A were shipped to customers by the end of the
month for total sales revenue of $225,000. Because 1,000 units were
produced and the total cost of the job from the job cost sheet was
$158,000, the unit product cost was $158. The following journal
entries would record the sale (all sales were on account):

(10)
Accounts Receivable 225,000
Sales 225,000
(11)
Cost of Goods Sold 118,500
Finished Goods 118,500
 2-63

Learning Objective 3

Prepare schedules of cost of

goods manufactured and cost
of goods sold and an income
statement.
 2-64

Schedules of Cost of Goods Manufactured

and Cost of Goods Sold
Both schedules contain three elements of product costs:
direct materials, direct labor, and manufacturing
overhead.
• The schedule of cost of goods manufactured
summarizes the portions of those costs remaining in
ending Work in Process inventory and transferred out
to Finished Goods.
• The schedule of cost of goods sold summarizes the
portions of those costs remaining in ending Finished
Goods inventory and transferred out to Cost of Goods
Sold.
 2-65

Product Cost Flows – Part 1

Raw material purchases made during the period are added to
beginning raw materials inventory. The ending raw materials inventory
is deducted to arrive at the raw materials used in production.

As items are removed from raw materials inventory and placed into
the production process, they are called direct materials.
 2-66

Product Cost Flows – Part 2

Direct labor used in production and manufacturing
overhead applied to production are added to direct
materials to arrive at total manufacturing costs.
 2-67

Product Cost Flows – Part 3

Total manufacturing costs are added to the
beginning work in process to arrive at total work in
process.
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total manufacturing
available for use costs to account for
in production
– Ending raw materials
inventory
= Raw materials used
in production
 2-68

Product Cost Flows – Part 4

The ending work in process inventory is deducted
from the total work in process for the period to
arrive at the cost of goods manufactured.
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total manufacturing
available for use costs to account for
in production – Ending work in
– Ending raw materials process inventory
inventory = Cost of goods
= Raw materials used manufactured
in production
 2-69

Product Cost Flows – Part 5

The cost of goods manufactured is added to the beginning finished goods
inventory to arrive at cost of goods available for sale. The ending finished
goods inventory is deducted from this figure to arrive at cost of goods sold.

Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total manufacturing = Cost of goods
costs to account for available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
 2-70

Concept Check 2
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
 2-71

Concept Check 3

Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added to
production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
 2-72

Concept Check 4

Beginning work in process was $125,000.

Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month. What
was the cost of goods manufactured during the
month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
 2-73

Concept Check 5

Beginning finished goods inventory was $130,000.

The cost of goods manufactured for the month was
$760,000. And the ending finished goods inventory
was $150,000. What was the cost of goods sold for
the month?
a. $ 20,000
b. $740,000
c. $780,000
d. $760,000
 2-74

Learning Objective 4

Compute underapplied or
overapplied overhead cost
and prepare the journal entry
to close the balance in
Manufacturing Overhead to
the appropriate accounts.
 2-75

Key Concepts - Underapplied and

Overapplied Overhead
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead exists Overapplied overhead exists
when the amount of overhead when the amount of overhead
applied to jobs during the applied to jobs during the
period using the period using the
predetermined overhead rate predetermined overhead rate
is less than the total amount of is greater than the total
overhead actually incurred amount of overhead actually
during the period. incurred during the period.
 2-76

Overhead Application
PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked on
jobs.
How much total overhead was applied to PearCo’s jobs
during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-77

Overhead Application Example

PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked on
jobs.
HowPearCo
much has
totaloverapplied
overhead was applied to PearCo’s jobs
overhead
during theforyear?
the year
Use PearCo’s predetermined
byoverhead
$30,000. rate
Whatofwill
$4.00 per direct labor hour.
PearCo do?

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-78

Concept Check 6

Tiger, Inc. had actual manufacturing overhead costs

of $1,210,000 and a predetermined overhead rate of
$4.00 per machine-hour. Tiger, Inc. worked 290,000
machine-hours during the period. Tiger’s
manufacturing overhead is:
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
 2-79

Disposition of Over or Underapplied

Overhead

Any remaining balance in the Manufacturing

Overhead account, such as PearCo’s $30,000
of overapplied overhead, is disposed of in one
of two ways:
1. It can be closed to Cost of Goods Sold.
2. It can be closed proportionally to Work in
Process, Finished Goods, and Cost of
Goods Sold.
The latter method is considered more accurate,
but it is more complex to compute.
 2-80

Disposition of Over or Underapplied

Overhead

PearCo’s PearCo’s
Cost of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
 2-81

Financial Adjustment for Overhead Applied

The cost of goods sold reported on a company’s

income statement must be adjusted to reflect
underapplied or overapplied overhead.

1.The adjustment for underapplied overhead

increases cost of goods sold and decreases net
operating income.
2.The adjustment for overapplied overhead
decreases cost of goods sold and increases
net operating income.
 2-82

Concept Check 7

What effect will closing the overapplied overhead

have on PearCo’s adjusted net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease..
 2-83

Schedules of Cost of Goods Manufactured and

Cost of Goods Sold