Mastering Manufacturing Overhead Application- A Comprehensive Guide to Calculation Techniques
How to Calculate Manufacturing Overhead Applied
Manufacturing overhead is an essential aspect of cost accounting that helps businesses determine the total cost of producing goods. Calculating manufacturing overhead applied is crucial for understanding the true cost of production and for making informed decisions about pricing, budgeting, and resource allocation. In this article, we will explore the steps involved in calculating manufacturing overhead applied, providing businesses with a clear and concise guide to this important financial metric.
Understanding Manufacturing Overhead
Manufacturing overhead refers to the indirect costs associated with the production process that cannot be directly attributed to a specific product. These costs include rent, utilities, depreciation, insurance, and salaries of administrative staff, among others. Manufacturing overhead is allocated to products based on a predetermined overhead rate, which is calculated by dividing the estimated overhead costs by an allocation base, such as direct labor hours or machine hours.
Step 1: Estimate the Total Manufacturing Overhead Costs
The first step in calculating manufacturing overhead applied is to estimate the total overhead costs for a specific period. This involves identifying all the indirect costs associated with the production process and adding them up. It is essential to be thorough in this step to ensure that no costs are overlooked.
Step 2: Determine the Allocation Base
The allocation base is a measure used to allocate manufacturing overhead costs to individual products. Common allocation bases include direct labor hours, machine hours, and direct labor costs. The choice of allocation base depends on the nature of the business and the production process. For example, a company with a labor-intensive production process may choose direct labor hours as the allocation base, while a company with a capital-intensive process may prefer machine hours.
Step 3: Calculate the Predetermined Overhead Rate
Once the total manufacturing overhead costs and the allocation base are determined, the next step is to calculate the predetermined overhead rate. This rate is calculated by dividing the total estimated overhead costs by the estimated total allocation base. For instance, if a company expects to incur $100,000 in overhead costs and to have 10,000 direct labor hours, the predetermined overhead rate would be $10 per direct labor hour.
Step 4: Allocate Manufacturing Overhead to Products
With the predetermined overhead rate in hand, the next step is to allocate manufacturing overhead to the products produced during the period. This is done by multiplying the predetermined overhead rate by the actual allocation base used by each product. For example, if a product requires 5 direct labor hours, the manufacturing overhead applied to that product would be $50 ($10 per hour x 5 hours).
Step 5: Review and Adjust
After calculating the manufacturing overhead applied to each product, it is important to review the results and make any necessary adjustments. This may involve comparing the actual overhead costs with the estimated costs, or adjusting the predetermined overhead rate if the allocation base has changed significantly.
In conclusion, calculating manufacturing overhead applied is a critical step in understanding the true cost of production. By following these steps, businesses can ensure that their financial records accurately reflect the costs associated with producing goods, leading to better decision-making and improved profitability.
