< Basic Objective For Accumulating Actual Factory Overhead

Basic Objective For Accumulating Actual Factory Overhead

ACTUAL FACTORY OVERHEAD : Estimating the factory overhead, deciding upon the base and activity level to be utilized, and calculating the overhead rate take place prior to the incurrence or recording of the actual Factory Overhead or expenses. Factory overhead is applied as soon as the necessary data, in this case direct labor hours, have been made available. Each day, however, as actual overhead items are purchased, requisitioned, or used, the actual transactions are recorded in general and subsidiary ledgers independent of the application of factory overhead based on the predetermined overhead rate.

Accumulation of Actual Factory Overhead for Control. Factory overhead includes numerous items which can be classified in many different ways. Every firm because of its own manufacturing peculiarities will devise its own particular accounts and methods of classifying them. However, regardless of these possible variations, expenses are usually summarized in a factory overhead control account kept in the general ledger. Details of this general ledger account are kept in a subsidiary overhead ledger.

This subsidiary ledger also can take many forms, and it may be difficult to recognize it as such, particularly when tabulating or electronic equipment is in use. A subsidiary ledger will group various expense items together under significant selective titles as to kinds of expenses and will also detail the expenses chargeable to individual producing and service departments, thereby permitting stricter control over factory overhead.

The accumulation of factory overhead in accounting records presents several distinct problems. Due to the many varied potential requests and ,uses of factory overhead data for managerial decision-making purposes, it is almost impossible to set up an all-purpose system for accumulating factory overhead.

A basic objective for accumulating factory overhead is the gathering  information for purposes of control. Control, in turn, requires:

(1) reporting costs to individual department heads responsible for them and

(2) making comparisons with amounts budgeted for the level of operations achieved.

The mechanics for collecting overhead items are based on the chart o accounts which indicates the accounts to which various factory overhead items are to be charged. Overhead items are ultimately identified with specific producing departments. At the end of the month or year, factory overhead applied and Actual factory overhead incurred are analyzed. The comparison between actual and applied figures might lead to computation of the spending and capacity variances.

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