Accounting for FOH
Measuring and recording manufacturing overhead cost
Manufacturing costs other than direct materials and direct labor are known as manufacturing overhead (also known as factory overhead). It usually consists of both variable and fixed components. Examples of manufacturing overhead cost include indirect materials, indirect labor, depreciation, salary of production manager, property taxes, fuel, electricity, grease used in machines, and insurance etc.
Unlike direct materials and direct labor, manufacturing overhead is an indirect cost that cannot be directly assigned to each individual job. This problem is solved by using a rate that is computed at the beginning of each period. This rate is known as predetermined overhead rate.
Application of manufacturing overhead:
As stated earlier, the predetermined overhead rate is computed at the beginning of the period and is used to apply manufacturing overhead cost to jobs throughout the period.
Manufacturing overhead cost is applied to jobs as follows:
Example:
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. The manufacturing overhead cost would be applied to this job as follows:
= $8.00 × 27 DLH
= $216
The manufacturing overhead cost assigned to the job is recorded on the job cost sheet of that particular job.
Journal entry to record manufacturing overhead cost:
The manufacturing overhead cost applied to the job is debited to work in process account. The journal entry for the applied manufacturing overhead cost, computed in the above example, would be made as follows:
Work in process
216
Manufacturing overhead
216
The reason of using a predetermined overhead rate rather than actual overhead costs:
Notice that the procedure of manufacturing overhead application described above is based on an estimated overhead
Manufacturing costs other than direct materials and direct labor are known as manufacturing overhead (also known as factory overhead). It usually consists of both variable and fixed components. Examples of manufacturing overhead cost include indirect materials, indirect labor, depreciation, salary of production manager, property taxes, fuel, electricity, grease used in machines, and insurance etc.
Unlike direct materials and direct labor, manufacturing overhead is an indirect cost that cannot be directly assigned to each individual job. This problem is solved by using a rate that is computed at the beginning of each period. This rate is known as predetermined overhead rate.
Application of manufacturing overhead:
As stated earlier, the predetermined overhead rate is computed at the beginning of the period and is used to apply manufacturing overhead cost to jobs throughout the period.
Manufacturing overhead cost is applied to jobs as follows:
Example:
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. The manufacturing overhead cost would be applied to this job as follows:
= $8.00 × 27 DLH
= $216
The manufacturing overhead cost assigned to the job is recorded on the job cost sheet of that particular job.
Journal entry to record manufacturing overhead cost:
The manufacturing overhead cost applied to the job is debited to work in process account. The journal entry for the applied manufacturing overhead cost, computed in the above example, would be made as follows:
Work in process
216
Manufacturing overhead
216
The reason of using a predetermined overhead rate rather than actual overhead costs:
Notice that the procedure of manufacturing overhead application described above is based on an estimated overhead