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4.2: Single factory rate to estimate factory overhead

  • Page ID
    44221
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    A single predetermined rate may be used to estimate factory overhead in all departments. The following amounts are given. Estimated factory overhead is based on number of direct labor hours used.

    Total budgeted factory overhead costs for the year

    $546,000

    Total budgeted direct labor hours

    3,000

    The factory overhead rate is $182 per direct labor hour, determined as follows.

    \(\ \frac{\text { Total budgeted factory overhead }}{\text { Total budgeted activity base }} \frac{\$ 546,000}{3,000}=\$ 182\)

    If 300 direct labor hours are used for the two jobs as follows, total estimated factory overhead is $54,600.

    Job 1: 210 hours x $182 per direct labor hour =

    $38,220

    Job 2: 90 hours x $182 per direct labor hour =

    16,380

    Total

    \(\ \overline{$54,600}\)

    The journal entry to apply factory overhead of $54,600 to the jobs is as follows:

    Account

    Debit

    Credit

     

    Work in Process

    54,600

     

    Work in Process is an asset (inventory) account that is increasing

    Factory Overhead

    54,600

    Factory Overhead is an expense account that is decreasing

           

    Rather than direct labor hours, machine hours, percentage of direct labor, or other relevant activity base could be used to estimate factory overhead.

    The single factory-wide rate is relatively simple to apply, but it assumes the same rate across all departments, each of which performs different functions. It also assumes all products consume factory overhead at the same rate. This “one-size-fits-all” approach may not be as accurate as other more targeted methods of estimating.


    This page titled 4.2: Single factory rate to estimate factory overhead is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.