About Purchase Overhead Costs

For products that include items with a purchase source, you can include the cost of purchasing those items as a purchase overhead cost. This is done using product codes that include a component for purchase overhead costs.

When purchase overhead has been defined for a product code, then for any item that uses that product code, purchase overhead cost is included in material transactions and journal entries created during the purchase order receiving process. Other receiving processes, such as transfer orders or miscellaneous receipts, do not record purchase overhead costs.

Purchase overhead costs are defined on the Product Codes form, the Purchased Overhead tab.

Note: The following examples use only one item for purchasing. In a "real-world" situation, there would likely be more.

Standard Cost Type Example

Company A has a product for which they purchase parts to use in production. They incur a 20% purchase overhead cost per unit. The Purchase Current Unit Cost for each product unit is set as:

Material - $10.00
Freight - $2.00
Purchase overhead - $2.00

At standard cost, this would translate to a total cost of $14.00 for each product unit.

With a standard cost applied at purchase time, however, the Material costs only $9.10, and the Freight cost is reduced to $1.10, resulting in a Material Cost of only $10.20. When the purchase overhead cost is calculated in at 20% of the material overrun, it amounts to only $0.01, and is included as part of the Fixed Overhead costs for Standard Unit Costs. This results in a total Unit Cost of $10.21.

The journal entry for this transaction might appear something like this:

		Debit	Credit
Inventory Material	12700	10.20	-
Inventory Fixed Overhead	12704	0.01	-
Vouchers Payable	20150	-	10.00
Purchase Price Variance	51400	0.90	-
Purchase Overhead Applied	58250	-	2.00
Purchase Overhead Variance	51480	1.99	-
Freight Payable	20152	-	2.00
Freight Variance	51460	0.90	-
			0.00

Actual Cost Type Example

Company B also has a product for which they purchase parts to use in production. They also incur a 20% purchase overhead cost per unit, and the Purchase Current Unit Cost for each product unit is set the same as for Company A.

This means that the unit Material Cost for each product unit remains at $12.00 (for material and freight), and the Fixed Overhead at $2.00 (for purchase overhead cost). This results in a total of $14.00 for each product unit, regardless of current costs in the marketplace.

The journal entry for this transaction might appear something like this:

		Debit	Credit
Inventory Material	12700	12.00	-
Inventory Fixed Overhead	12704	2.00	-
Vouchers Payable	20150	-	10.00
Purchase Overhead Applied	58250	-	2.00
Freight Payable	20152	-	2.00