how is general factory estimated overhead cost found?

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Factory overheads are the costs incurred during manufacturing other than Direct Material Cost and Direct Labour Cost.
These costs are directly associated with operating the production.
Examples of Factory overheads are Electricity, fuel, Indirect labour, Indirect Material, repair of manufacturing plant etc.

Estimated Overhead is calculated before period begins. For determining estimated Factory overhead, There is no definative rules.

Factory Overhead costs can be fixed, Variable and Mixed. Based on past record, company can estimate factory Overhead. It can estimate Total Factory Overhear, Activity Base, Cost Base etc

Overheads are generally expressed in percentange of Sales, Material Cost, Labour Cost etc. This base of the percentage depends on the nature of overhead and its direct relation with sales, Material or Labour.

For Example, If Factory cost is 50% of Direct Labour. Amount of Direct labour is $10000. Then Estimated Factory Overhead will be $5000.

Estimated overhead cost can be calculated by using Machine hours, Labour hours or No of units produced.
For example - If total factory overhead in a year in $50000 and no of labour hour is 10000. Then Estimated factory overhead will be = $5 per labour hour.

The selection of basis (i.e Machine hours, Labour Hours or Units) depends on 'Direct relationship' of Factory Overheads with these basis.

Apart from Above methods, Factory Overhead can be estimated based of Activities.
For example - If total Setup cost in a year is $5000 and total Setup Hours is 1000. Then Estimated Setup Cost = $5 per setup hour.

ekkarill92 answered 8 months ago

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