Accounting

Use Of Predetermined Manufacturing Overhead Rate

The Use of a Predetermined Manufacturing Overhead Rate: A Predetermined Manufacturing overhead rate is used for both job costing and process costing system of cost accumulation procedures.

In Job Costing: In Job costing, Actual costs of direct materials and direct labor used on a job are determined from materials requisitions and time cards  and are entered on job order cost sheets. Predetermined Manufacturing Overhead rate is been taken from cost data to arrive at the total amount of overhead estimated for the activity level to be used in computing the rate. This total cost is then related to estimated direct labor hours, machine hours, direct labor dollars, or some other base for the same activity level, ultimately to be expressed in a rate.

For example, overhead applicable to a job may be calculated by multiplying actual direct labor hours incurred on the job by the predetermined Manufacturing overhead rate. The amount of overhead is then entered on the job order cost sheet, and the cost of a job is known at the time the job is completed.

 In Process Costing:

With a process cost system, unit costs are computed by dividing total weekly or monthly costs of each process by the output of that process. While a process cost system could produce product costs without the use of overhead rates, a predetermined manufacturing rate is recommended since they speed up unit product cost calculations and offer other distinct advantages when cost or production levels are subject to wide fluctuations. The use of overhead rates for process costing is similar to that for job order costing

The use of a predetermined factory overhead rate for the purpose of charging a fair share of factory expenses to products was introduced briefly in earlier posts. The discussion is continued and analyzed in this lesson and the next few lessons. Other than a predetermined factory overhead rate , In this area I will:

(1) discuss the methods, procedures, and bases available for applying factory overhead,

(2) describe methods and procedures for classifying and accumulating actual factory overhead,

(3) show computations for over-or under applied factory overhead, and then (4) analyze the total variance into the spending and idle capacity variances.

In future I will discuss the following:

(1) cover the departmentalization of factory overhead,

(2) explain the creation and use of separate departmental overhead rates, and (3) discuss departmentalization in non-manufacturing businesses and nonprofit institutions and organizations.

And more later I will:

(1) describe the relationship of product costing to responsibility accounting, (2) explain this relationship using the maintenance department and its cost as an example, and

(3) present monthly overhead variance analysis for use in responsibility accounting and reporting, both for production and service departments.

Factory overhead is generally defined as the cost of indirect indirect labor,  and all other factory expenses that cannot easily be identified with nor charged directly to specific jobs or products. The assignment of factory overhead to departments and, ultimately, to specific jobs and products is discussed in the next chapter. Factory overhead consists of all production costs other than direct materials and direct labor. Use of a predetermined factory overhead rate is found in many industries.

Other terms used for factory overhead are factory burden, manufacturing expenses, manufacturing overhead, factory expenses, and indirect manufacturing cost.

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