Accounting

Overhead Allocation: Units of Production Basis

Units of Production Basis:  The units of production basis is the simplest and most direct method of applying factory overhead. This formula is widely used in calculating overhead per unit. Units of production basis of Overhead Allocation is easy to use and understand and is computed as under:

The Formula for units of production basis of Overhead Allocation :

Estimated Factory Overhead / Estimated Units of Production= Overhead per Unit

If estimated expenses are $300,000 and the company intends to produce 250,000 units during the next period, each completed unit would be charged with $1 .20 ($300,000 / 250,000 units) as its share of factory overhead. An order with 1,000 completed units would be charged with $1,200 (1,000 units X $1.20) of factory overhead.

Again, If estimated expenses are $500,000 and the company intends to produce 250,000 units during the next period, each completed unit would be charged with $1.00 ($250,000 / 250,000 units) as its share of factory overhead. An order with 1,000 completed units would be charged with $1,200 (1,000 units X $1.00) of factory overhead. So, more the production units less is the rate of overhead (if other things remain constant).

The units of production basis is satisfactory when a company manufactures only one product; otherwise, the method is either unsatisfactory or subject to arbitrary allocation procedures. However, if the several products manufactured are alike or closely related (their difference being merely one of weight or volume), application of factory overhead can be made on a weight or a point basis. The weight basis applies overhead on the basis of the weight of each unit of product.

If the weight basis does not seem to yield a just apportionment of overhead, the method can be improved by assigning a certain number of points to each unit to compensate for differences.

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