Module No 7 - Manufacturing Overhead Accounting
Module No 7 - Manufacturing Overhead Accounting
Module No 7 - Manufacturing Overhead Accounting
Learning Outcome/s:
Define and identify different examples of manufacturing overhead
Properly classify manufacturing overhead costs
Acquire skills to appropriately charge the overhead to production using different bases
Determine the overapplied and underapplied overhead and prepare journal entries
Introduction:
The third type of production cost, the manufacturing overhead, will be discussed below. This module
will discuss the procedures in applying manufacturing overhead using a single predetermined overhead
rate and the procedures in recording manufacturing overhead.
Body:
Manufacturing overhead costs – costs that are not conveniently identified with particular units of
products. These include all factory costs other than direct materials and direct labor. These are
sometimes called manufacturing expenses, factory burden, factory overhead, factory expenses and
indirect manufacturing costs.
Predetermined overhead rate – rate calculated at the beginning of a period. Its primary purpose is to
charge a fair share of overhead costs to each job. A number of bases for determining overhead rates
may be used to compute an overhead application rate:
1. Direct labor costs – this method is widely used because it is simple and easy to use.
Predetermined overhead rate is calculated by dividing the estimated manufacturing overhead
costs by the estimated direct labor costs.
2. Direct labor hours – this method assumes that overhead costs tend to vary with the number of
hours of direct labor used.
4. Machine hours – overhead may be applied as a rate for each machine hour when work is
performed principally by machines.
5. Units of production – this is used only if the manufacturing process is a simple one and only if
one type, or a few similar types, of products are produced.
Illustration
Assume the following budgeted data for the year:
Manufacturing overhead costs Php 96,000
Number of units of production 24,000 units
Direct material costs Php 480,000
Machine hours 12,000 hours
Direct labor hours 40,000 hours
Direct labor costs Php 200,000
2. Underapplied overhead – results when product costs are understated because the actual
overhead costs were higher than expected (applied overhead). This will show as a debit balance
in the manufacturing overhead control account.
Illustration
Assume that the applied manufacturing overhead of ABC Company is Php 500,000. However, the actual
manufacturing overhead costs incurred totaled Php 600,000. Further, the year-end balances of the
company are as follows:
Work in process Php 40,000
Finished goods 80,000
Cost of goods sold 280,000
Summary:
There are different bases that the company may use for the computation of the predetermined
manufacturing overhead rate. Company shall select the base to used according to some factors such as
the type of goods produced, amount of machinery employed, type of labor used, wage rates paid, etc.
References:
Cost Accounting Principles and Procedural Applications by Pedro P. Guerrero, 2014-2015 edition