Question

What types of costs are included in overhead? What are predetermined rates? How are those accounted for? Give examples to support your comments.

Answer 1

What types of costs are included in overhead? What are predetermined rates? How are those accounted for? Give examples to support your comments.

What type of costs included in Overhead?

Overhead includes costs which are not directly attributable to the specific item produced or particular activity of the business but these costs are required to operate the business.

Following are the example:

Factory rent, utilities, indirect material, insurance, administrative salaries, Depreciation etc.

What are predetermined rates?

Predetermined rates are on the basis of which overhead is recorded initially for example if a Company has determined overhead rate is 50% of direct labor cost then the Company firstly record the overhead as 50% of direct labor cost and at last when they will have the actual amount of overhead they will adjust the under or over applied overhead.

Formula for predetermined overhead rate:

Estimated manufacturing overhead cost/ Estimated allocation base *

*allocation bas can be labor hours, labor cost, machine hoursunit produced etc.

Example and accounting entries:

Predetermined rate of overhead is 50% of direct labor cost.

Cost incurred for the month June 2017– Direct labor - $100,000

Estimated overhead will be 50% of direct labor cost = $50,000

Now at the end of month June 2017 actual overhead cost was - $55,000

Less: Estimated overhead cost - $50,000

Under applied overhead cost   - $5,000

General Journal	Debit	Credit
Work in Process inventory	$50,000
Factory Overhead		$50,000
(To record estimated manufacturing overhead)
Factory Overhead	$55,000
Cash		$55,000
(To record overhead expenses paid)
Work in Process inventory/ Cost of goods sold	$5,000
Factory Overhead		$5,000
(To record under-applied overhead)