4.2: Single factory rate to estimate factory overhead
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.