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    Mlesson 3

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    jajamea tabat
    The document discusses accounting for factory overhead costs. It defines fixed and variable overhead costs and mixed costs. It explains how to calculate a predetermined overhead rate using different activity bases and capacity levels to determine overhead costs.

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    Mlesson 3

    Uploaded by

    jajamea tabat
    9 views15 pages
    The document discusses accounting for factory overhead costs. It defines fixed and variable overhead costs and mixed costs. It explains how to calculate a predetermined overhead rate using different activity bases and capacity levels to determine overhead costs.

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    MLESSON-3

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    © © All Rights Reserved

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    The document discusses accounting for factory overhead costs. It defines fixed and variable overhead costs and mixed costs. It explains how to calculate a predetermined overhead rate using different activity bases and capacity levels to determine overhead costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    9 views15 pages

    Mlesson 3

    Uploaded by

    jajamea tabat
    The document discusses accounting for factory overhead costs. It defines fixed and variable overhead costs and mixed costs. It explains how to calculate a predetermined overhead rate using different activity bases and capacity levels to determine overhead costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    Lesson 3 : Accounting

    for Factory Overhead


    OBJECTIVES:
    At the end of the topic the students will be able to:
    1. Differentiate fixed overhead from variable overhead
    2. Explain how mixed costs can be separated into fixed and
    variable components
    3. Discuss the purpose of predetermined overhead rate
    4. Describe different capacity levels used in determining
    overhead cost
    Introduction
    All cost incurred in the factory that are not direct
    materials or direct labor are generally termed as
    factory overhead. Factory overhead refers to the cost
    pool used to accumulate all indirect manufacturing
    cost.
    Manufacturing overhead can be termed as the
    costs/expenses related to all manufacturing activities that occur
    during the course of production other than direct materials and
    direct labor. Thus, manufacturing costs can be termed as an
    indirect cost. For example, depreciation, rents and property
    taxes, salaries, repairs and maintenance, electricity bills are
    indirect costs. Manufacturing overheads are indirect in nature
    and hence to some expense these are fixed and are not affected
    by the number of units produced in the production facility
    01 COST BEHAVIOR
    PATTERN
    1. Variable factory overhead Cost- cost that vary in proportion
    to volume changes
    2. Fixed cost- remains constant- cost that remains constant within
    the relevant range regardless of the varying levels of
    production.
    3. Mixed factory overhead cost- has characteristics of both
    fixed and variable costs
    02 Budgeting Factory Overhead
    Budgets are management’s operating plans expressed in
    quantitative terms. After factory overhead costs have been
    classified as either fixed, or variable, budgets can be prepared for
    expected levels of production. A predetermined overhead rate is set
    at the beginning of the year and is calculated as the estimated
    (budgeted) overhead costs for the year divided by the estimated
    (budgeted) level of activity for the year.
    02 Budgeting Factory Overhead
    This activity base is often direct labor hours, direct
    labor costs, or machine hours. Once a company
    determines the overhead rate, it determines the overhead
    rate per unit and adds the overhead per unit cost to the
    direct material and direct labor costs for the product to
    find the total cost.
    Methods of predetermined factory
    Overhead Rate
    Direct Labor Cost Method- this method is used if it can be
    established that there is a direct relationship between labor cost
    and factory overhead.
    Methods of predetermined factory
    Overhead Rate
    Machine Hours- appropriate when a direct relationship exists between
    factory overhead cost and machine hours.
    Methods of predetermined factory
    Overhead Rate
    Direct Material Cost- appropriate if it can be inferred that factory
    overhead costs are directly related to direct material cost.

    Factory Overhead Rate = Estimated Factory Overhead


    Estimated Direct Material Cost
    Methods of predetermined factory
    Overhead Rate
    Units of production- appropriate when a company or department
    manufactures only one product.
    Factory Overhead Rate = Estimated Factory Overhead
    Estimated Units of production
    = Factory overhead rate/ Unit of production
    Methods of predetermined factory
    Overhead Rate
    Units of production- appropriate when a company or department
    manufactures only one product.
    Factory Overhead Rate = Estimated Factory Overhead
    Estimated Units of production
    = Factory overhead rate/ Unit of production
    Capacity Production
    In the estimation of manufacturing overhead, it is important to determine
    what capacity of production should be adopted.

    a. Theoretical, maximum or ideal capacity- a capacity to produce at


    full speed without interruptions.
    b. Practical capacity- capacity of production that provides allowance
    for circumstances that might result to stoppage of production.
    Capacity Production
    c. Expected actual capacity- a capacity concept based in a short-
    range outlook which is feasible only for firms whose products are
    seasonal.
    d. Normal Capacity- a capacity of production taking into
    consideration the utilization of the planet facilities to meet
    commercial demands served over a period long enough to level out
    the peaks and valleys which come with the seasonal and cyclical
    variations.
    Thank You for Listening!

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