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. Please give examples for each definition.

Answer 1

Direct Manufacturing item : These are those which are attributable to a product. They are wholly consumed in the production and are transformed in Final Product.

Example: wood is direct manufacturing item for a making of table

Indirect manufacturing item: These are those items which support the production process and are supplementary to the production.

Example: Adhesive used in making of table.

Variable manufacturing overhead: variable expenses are those which vary with the units of the production. If units are increased , variable manufacturing costs will increase simultaneously.

Example: Direct Material, Direct labour are variable expenses for a manufacturing process.

Fixed manufacturing overhead: These are those expenses which are certain to incurs regardless of the units of production. They do not vary with the units of production

Example: Rent of production machine.

Rent of say $50000 will incurs irrespective of the fact that 200/2000 units are produced on such machine.

Predetermined manufacturing overhead: it is the estimate made by the company for a given period. Say a company estimates that in a month $7600000 manufacturing overhead will incurr. These estimates are based on past experiences and future forecasts.

Predetermined manufacturing overhead rate: This rate is calculated by the following:

Predetermined manufacturing overhead/ Estimated production/hours

This is the rate calculated based on estimates

Estimated hours for production=80000

Example: rate= $7600000/80000hrs=$95/hr

Base for predetermined overhead rate can be units of production or labour hours or machine hours as the case maybe.

Predetermined overhead rate is obviously dependent upon the units of production. As the units of production increases the overhead are applied on job accordingly.