Accounting

3 Types Of Factory Overhead In Cost Accounting

Factory overhead is entered on the job order cost sheets on the basis of a predetermined  rate based on direct labor hours, direct labor cost, machine hours, or other appropriate bases. A brief explanation of the procedure is advisable here to complete the picture of the cost cycle. In principle, the accountant determines a causal relationship between two factors, such as the direct labor hours and factory overhead, and uses this relationship as the means of charging overhead to jobs.

For example, suppose direct labor hours for the Sharlock Manufacturing Company were estimated to be 12,000 hours and factory overhead to be $26,400. These estimates lead to the assumption that for each hour of direct labor there is $2.20 of Manufacturing OH. The job order cost sheet for any job done during the period would disclose the Manufacturing overhead applicable to the job (direct labor hours worked on the job times the Manufacturing overhead rate).

Factory Overhead Applied Account:

The applied factory overhead entered on the job order cost sheet for each job is the basis for this entry:

Work in Process                                             13,200
FactoryOverhead Applied                                       13,200

(6,000 direct labor hours X $2.20)

The overhead applied account is closed to the actual factory overhead control account at the end of the accounting period :

Factory Overhead-Applied            13,200
Factory Overhead-Control                              13,200

It is common practice, as in the Sharlock Manufacturing Company, to use a Manufacturing overhead applied account because it keeps applied and actual costs in separate accounts. Some companies do not use the Manufacturing overhead applied account and post the credit directly to Manufacturing Overhead Control:

Work in Process                13,200
Factory/Manufacturing Overhead Control           13,200

This entry eliminates the transfer of applied expenses to actual expenses.

Actual Manufacturing Overhead: While job order cost sheets receive Overhead on the basis of a predetermined Manufacturing overhead rate, actual overhead (consisting of indirect materials, indirect labor, payroll taxes, invoices received for overhead items, and the monthly adjusting entries such as depreciation and expired insurance) is charged to Manufacturing Overhead Control and to departmental expense analysis sheets.

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