when raw materials are purchased they are recorded as an expense 633898

Process costing is used in those situations where many different products or services are produced each period to customer specifications.

The basic approach in job-order costing is to accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then to divide this total by the number of units produced during the period.

If a company uses predetermined overhead rates, actual manufacturing overhead costs of a period will be recorded in the Manufacturing Overhead account, but they will not be recorded on the job cost sheets for the period. In a job-order cost system, indirect labor is assigned to a job by using the labor time ticket as a source document.

The formula for computing the predetermined overhead rate is: Estimated total units in base ÷ Estimated total manufacturing costs

The fact that one department may be labor intensive while another department is machine intensive may explain in part the existence of multiple predetermined overhead rates in larger companies.

If a company closes any under- or overapplied overhead to the Cost of Goods Sold account, then Cost of Goods Sold will be credited if manufacturing overhead is overapplied for the period.

The following entry would be used to record the transfer of material from the storeroom to production if 80% of the material was direct material and 20% was indirect material:

Work in Process


Manufacturing Overhead


Raw Material


If a job is not completed at the end of the year, then no manufacturing overhead cost should be applied to that job.

When raw materials are purchased, they are recorded as an expense.

In a job-order cost system, depreciation on factory equipment should be charged directly to the Work in Process account.

The entire difference between the actual manufacturing overhead cost for a period and the applied manufacturing overhead cost is typically closed to the Work In Process account.

If the actual manufacturing overhead costs for a period exceed the manufacturing overhead costs applied, then overhead would be considered to be overapplied.

When the predetermined overhead rate is based on the level of activity at capacity, the overhead underapplied may be called the Cost of Unused Capacity and treated as a period expense.

The absorption cost approach is so named because it provides for the absorption of all manufacturing costs, fixed and variable, into units of product.