Accounting for Factory OverheadCHAPTER

IV

Pre-determined Overhead

Rate

Manufacturing Overhead Account

Manufacturing Overhead

(Factory Overhead, Factory burden, and Manufacturing Support Costs)

a. Indirect factory-related costs that are incurred when a product is

manufactured.

b. examples of Manufacturing Overhead:• Indirect Labor• Utilities• Supplies

• Other Cost related to Manufacturing

OVERHEADNonmanufacturing

Costs (Administrative Overhead)

a. Manufacturer's expenses that occur apart from the actual manufacturing

function.

b. Nonmanufacturing costs include activities associated with the Selling and

General Administrative functions.

(Operating Expense)

Manufacturing Overhead Account• The amount of overhead applied to the job is calculated using the formula:

Sample Problem:1. Suppose the GX company has completed a job order. The time tickets show that

the workers have worked for 27 hours to complete the job. The predetermined overhead rate computed at the beginning of the year is $8 per direct labor hour. What is the manufacturing overhead cost applied to the job?

Solution: MOH = Predetermined Overhead Rate x Actual Level of Activity (DLH) = $8.00 × 27 DLH = $216

The journal entry for the applied manufacturing overhead cost, computed in the above example, would be made as follows:

Pre-determined Overhead Ratea. A predetermined overhead rate is a

budgeted and constant charge per unit of Activity (Overhead Allocation Base

or Cost Driver).

c. The formula of predetermined overhead rate is written as follows:

Sample Problem:

b. The commonly used activity bases are:• Physical output • Direct labor costs• Direct labor hours

• Material costs

• Machine hours• Activities

1. Suppose GX company uses direct labor hours to assign manufacturing overhead cost to job orders. The budget of the GX company shows an estimated manufacturing overhead cost of $8,000 for the forthcoming year. The company estimates that 1,000 direct labors hours will be worked in the forthcoming year.

Solution:Predetermined OH Rate = Budgeted Manufacturing Overhead/Budgeted Production Activity

= $8,000 / 1,000 hours= $8.00 per direct labor hour