Question

Please define each of the following terms, direct manufacturing item, indirect manufacturing item, variable manufacturing overhead, fixed manufacturing overhead, pre-determined manufacturing overhead, pre-determined manufacturing overhead rate, and the base for pre-determined manufacturing overhead rate. Then discuss if predetermined manufacturing overhead rate depends on production level. Provide examples to clarify and support your argument.

Please provide your answer more than 350 words in word format only. Please dont copy paste from website or from Chegg post. Please give examples for each definition.

Answer 1

Direct manufacturing item :-

These are those materials who are primarily involved in the manufacturing of the product or we can say these can be directly identified in the product and directly charged to the product. For example:- To manufacturing a furniture we require timber or wood , To manufacturing a building we require bricks , To manufacturing a cloth we require fabrics so all these are direct manufacturing items.

2) Indirect Manufacturing Item:-

These are those manufacturing item which are not directly related to the manufacturing of the item or not directly traceable with the product but somehow these material are important for the manufacturing of item and consider as secondary item in manufacturing of a product.For example:- Material require for repairs and maintenance of fixed assets which are generally used in the manufacturing of product , high speed diesel used in power generator etc.

3) Variable manufacturing overhead:- These are those cost which changes with change in production output. It is constant in per unit but changes in total always. Main concelc behind it is to determine the lowest possible prices at which a product should be sold. Example :- Production supplies, Material Handling wages , Direct material etc

If a company manufacture 10000 units and it's production cost is $10000 or $1 per unit but with 15000 units it's production cost turn out to be $15000 or $1 per unit .

So it is per unit remain the same and changes in total cost with respect to production.

4) Fixed manufacturing overhead:-

These cost do not change with change in level of output these cost remain the same whatever the production it would be. These cost remain the same in total but vary in per unit basis.

For example :- Rent and insurance cost whatever we incurred these will be remain the same through out the production lrocess. These will not changes with increase or decrease in production level. If we produce whether 10000 unit or 15000 unit and rent is $20000 so it would be same in all cases.

5) Pre determined manufacturing overhead Rate:-

It is basically used to apply manufacturing overhead to products or job orders .

It is computed by dividing the Estimated manufacturing overhead by the Estimated unit in the allocation base.

Most commonly base of Pre determined overhead rayes are Direct Labour Hours, Machine Hours and Direct materials etc.

For example:- A company uses direct labor hours to assign manufacturing overhead to the job orders. the estimated manufacturing overhead are $10000 and estimated direct labor hour in forthcoming period would be 1000 labor hours. So pre determined overhead Rate would be $10000/1000 I. E $10 per diect labor .

It also depends on the production level for example if we incurred manufacturing overhead of $50000 on production of 10000 units then we can determine that ($50000/10000 units) it would be $5per units estimated. So if we produce in next period 20000 unit then manufacturing overhead is (20000*$5) equal to $100000 manufacturing overhead.

6) the base of Pre determined overhead Rate :-

It would be the basis for allocation of manufacturing overhead in the forthcoming period. It can be direct labor , direct material and machine hour etc. We would estimate that in near future we have to incurr 1000 machine hour so it would be the estimate basis to determine pre overhead Rate.