Manufacturing Overhead Journal Entry
In job order costing, the manufacturing overhead is the cost that relates to the whole production operation but cannot be charged directly to the specific jobs. Likewise, the journal entry for manufacturing overhead starts when the company assigns all the indirect production costs to the overhead first before transferring to the work in process of the specific job.
When the company needs to assign the indirect production costs of overhead to work in process of a specific job, it needs to do so through the use of the predetermined overhead rate.
Manufacturing overhead journal entry
Assign indirect costs to overhead
The company can make the manufacturing overhead journal entry when assigning the indirect costs to overhead by debiting the manufacturing overhead account and crediting all the indirect production costs.
|Raw materials (indirect)||$$$|
|Labor cost (indirect)||$$$|
|Other indirect production costs||$$$|
In this journal entry, raw materials and labor costs only include the indirect cost as the direct cost can be assigned to the work in process of the specific job directly. Other indirect production costs include utilities, insurance, depreciation, property tax, repairs and maintenance, etc.
Assign overhead costs to work in process
After determining the predetermined overhead rate, the company can make the journal entry to assign the overhead cost to work in process for a specific job as below:
|Work in process inventory||$$$|
For example, in January 2021, the manufacturing company ABC uses $1,500 of the indirect raw materials and $1,000 of indirect labor cost. Other indirect production costs, including depreciation, utilities, insurance, property tax, maintenance and repairs, have the total amount of $6,000.
The company ABC expects to incur the manufacturing overhead cost of $100,000 with the 20,000 machine hours for a whole year. And, in January 2021, Job A has used 1,600 machine hours.
What is the manufacturing overhead journal entry?
- when assigning indirect costs to manufacturing overhead
- when assigning overhead cost to work in process of Job A
Assigning indirect costs to manufacturing overhead
The company ABC can make the manufacturing overhead journal entry when assigning the indirect costs to overhead as below:
|Raw materials (indirect)||1,500|
|Labor cost (indirect)||1,000|
|Other indirect production costs||6,000|
Assigning manufacturing overhead to work in process
With the information in the example above, the company ABC can determine the overhead rate as below:
Predetermined overhead rate = $100,000 / 20,000 hours = $5/hr
Overhead assigned to Job A = 1,600 x 5 = $8,000
Hence, the company can make the journal entry to assign the manufacturing overhead to the work in process of Job A as below:
|Work in process inventory||8,000|
After this journal entry, the balance of manufacturing overhead remains $500 (8,500 – 8,000) on the debit side of the ledger. This a sign of underapplied overhead; though whether it is under or overapplied overhead, it will be shown at the end of the accounting period.