How to calculate Predetermined Overhead Rate easily?

Spread the love

Predetermined Overhead Rate for machine hours is calculated by dividing estimated manufacturing overhead cost total by estimated machine hours.

Departmentalization of factory overhead means dividing plant into parts or sections called cost centers to which expenses are charged. From the accounting point of view, the division of plant into separate segment. According to some logical form provides more accurate results and better control. More accurate costing of jobs and products is possible. Each department will be charged with overhead rates which are reasonable for that department. Job or product going through different departments will be charged with predetermined rates of those departments overhead rate. Overhead cost, depending upon the type and number of departments through which a product passes. It will be charged, and in this way it will be easy job to calculate the cost of a product at any stage. It may be the requirement of the organization.

Easy to control with it:

As the cost records of the overhead are available department wise. It is easy to control and to find out the reason or reasons of any variance. There are two main types or class of departments. One is the producing department which is engage in actual manufacturing of the products by changing the shape. It form or nature of the materials worked upon, or by just assembling the parts into a finished product. A few examples of producing departments are spinning departments, weaving departments, finishing departments cutting departments etc. Other one is service department which produces nothing but helps in production indirectly by rendering services to other departments. A few examples of services departments are repairing department, purchasing departments, storage departments, cafeteria, inspection etc. Type of departments in which manufacturing concern will be divide largely depends on nature of its business, size, and requirements.

Helps to run business smoothly:

A small size of a manufacturing concern may be having only one department and big concern may have many departments. But the number of department should be such that should help for the smooth running of all operations. Rather than being a cause of the red tapeism. There are no hard and fast rules for the establishment of departments. The most common approach is to divide factory along lines of functional activities or group of activities constituting a department. For proper control of factory overhead and accuracy in costing production, division of factory into separate, interrelated and independently governed. It is categorize as indirect costs, manufacturing overhead costs are expenses that result from the manufacturing of the organization’s products. These costs are only incur because of production. They include items such as equipment and building depreciation, facility maintenance, factory utilities and factory supplies.

Manufacturing overhead costs can also include the salaries of some manufacturing employees and also it helps a lot in business and all business use it. It gives estimation of overhead rate which are very useful so you must have to check all the details about it and how it calculated.