Note re applying Overhead to a Product-1

Therefore for these reasons some other method was

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Therefore, for these reasons, some other method was needed to get the MO costs charged into the job or product. The method that was universally selected was to use a Pre-determined Overhead rate that would be estimated at the beginning of the year . Pre-determined MO rate = Estimated Mfg Overhead in $ (for all items) Estimated units of an allocation base In order to ensure that the overhead rate could be charged to all products, we need to use an allocation base that is common to all types of products (assuming many companies have multiple products). If you use # of units of product, you can only have one product type because you are only allowed one diviser for the rate calculation. Therefore the allocation bases that are common to all types of products are: Direct Labour Hours (rate per DLH) Diret Labour Cost in $ (rate per DL$) Direct Machine Hours (rate per DMH) By using one of these allocation bases and by using annual estimates in the rate equation (rather than monthly estimates) , you average out the effects of busy times versus slack times during the year. Use of a pre-determined overhead rate is called a Normal Cost System . That is, you use a “normalized” overhead rate for the whole year based on an estimate. Amount of Overhead Charged to a Job or Product The amount of MO charged to a job or product is called MO-applied MO applied = Actual DLH’s* x Pre-determined rate
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(*or other allocation base such as DL$’s or DMH’s) This would allow the MO to be applied to the job as soon as Direct Labour hrs or Direct Labour costs had been accumulated. It would not depend on actual bills for overhead items being received. Hence, there would be no delays in accumulating the costs for a job.
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  • Winter '12
  • Farrar
  • Revenue, Wage labour

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