3. Labour costs
Once the payroll accounting has been done, that is the
determination of the gross pay for each employee and the calculation of
payments to be made to employees, government, pension funds and others. We can
now allocate labour costs to the various jobs, overhead accounts and capital
accounts.
The wages due to employees are computed from the records of
each employee time tickets. These tickets show the time periods spent on each
job and the various indirect labour hours. It is recorded as follows:
Dr works in progress
account...................................*****
Dr factory overhead
account...................................******
Cr salaries and wages payable
account..............******
4. Manufacturing
overheads
This concerns all the factory costs other than direct
materials, labour and expenses. They are entered into the factory overhead
account as they are incurred. This is done as follows:
Dr factory overhead account
...............******
Cr account payable.............
......****
Cr property tax payable account. ...****
Cr prepaid insurance
account...........****
Cr accumulated depreciation account...***
Now we must charge these costs to the various jobs, this needs
to be done following an objective measure. This measure is known as the
predetermined overhead absorption rate. The overhead
absorption rate is a kind of coefficient, which is used to allocate
manufacturing overhead costs to jobs. It is computed using an allocation base;
this allocation base refers to the most influential cost driver for that
particular cost. This means that there may be several overhead absorption rates
for various costs depending on the allocation base used. The overhead
absorption rate is determined at the beginning of the accounting period using
the formula:
Predetermined overhead absorption rate=estimated total
manufacturing overhead cost/ estimated total units in the allocation
base
Once we have obtained the overhead absorption rate (OAR),
assigning overheads to a job is done as such:
Overhead applied to a job= OAR*amount of the
allocation base incurred by the job
Given the OAR, we can then apply manufacturing overheads to
the jobs and this is reflected in the accounts as follows:
Dr Work in progress
account.........................*****
Cr factory overhead
account.................*****
Once all the entries have been posted into the factory
overhead control account, we can then reconcile the two sides of that account.
Normally if the two sides are equal, this will mean that the company charged
the same costs that it incurred. A larger debit side means that the company
charged less than what it actually incurred and the balance between the two
sides is referred to as the under absorbed overhead costs and
they must be posted to the debit side of the profit and loss account as a
period cost.
A larger credit side of the factory overhead account will mean
that the company charged more costs than what it actually incurred and the
balance between the two sides is called the over absorbed overhead
cost, and it must be posted to the credit side of the profit and loss
account in order to reconcile between the various accounts of the company.
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