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Overhead Cost Allocation Partnership Accounting

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Mae Zenica Virtus
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11 views2 pages

Overhead Cost Allocation Partnership Accounting

Reviewer

Uploaded by

Mae Zenica Virtus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Normal costing

-alternative of actual costing

Uses the actual direct material and direct labor to products but allocates manufacturing overhead to products using a
predetermined rate

Cost allocation is in line matching principle.

Cost principle- all production or acquisition costs that are attached to the units produced, services rendered, or units
purchased.

Primary reasons for using predetermined OH rates

• It assists in determining the overhead during a period as goods are produced or sold and services are rendered. It
improves the timeliness of information.

• It helps in having the correct variations brought by fluctuations in activity since it can vary monthly due to factors like
when it is seasonal.

• It resolves the effects of fluctuations in activity levels that have no impact on fixed overhead costs. The changes in
activity levels between periods would cause a perunit change in fixed overhead cost

• It often allows managers to know the profitability of product or product line as well as the profitability of business
with a particular customer or vendor.

Formula for predetermined overhead rate

Predetermined OH Rate = Total Budgeted OH Cost at a Specified Activity Level

Volume of Specified Activity Level

Overhead cost and its related activity measure are typically budgeted for one year, although a longer or shorter period
could vary in some organizations’ production cycle.

Companies should use an activity base that is logically related to actual overhead cost incurrence.

Production volume might be the first activity base considered if the company manufactures one type of product or
renders just one type of service.

Production volumes cannot be summed to determine activity if a company makes multiple products or performs
multiple services

How to measure overhead to heterogeneous products or service

The activity base should be a cost driver that directly causes the incurrence of overhead costs. Direct labor
hours and direct labor amount are common activity measures; however, these bases could be defi cient if a company is
highly automated.

Using any direct labor measure to allocate overhead costs in automated plants results in extremely high
overhead rates because the costs are applied over a relatively small activity base.

In automated plants, machine hours could be a more appropriate base for allocating overhead.

Other possible measures include the

• number of purchase orders,

• product-related physical characteristics such as tons or gallons,

• number of, or amount of time used performing, machine setups,

• number of parts

, • material handling time,


• product complexity, and

• number of product defects

Applying overhead to Production

Applied overhead is the amount of overhead assigned to WIP Inventory using the activity measure that was selected to
develop the application rate. The calculated OH rate is used throughout the period.

Underapplied and Overapplied Overhead

The difference from total applied overhead to total actual overhead at the year-end.

Underapplied overhead- the overhead applied to Work in Process Inventory is less than the actual overhead incurred.
Overapplied overhead- the overhead applied to Work in Process Inventory is more than actual overhead incurred.
Underapplied or overapplied overhead must be closed at year-end because a single year’s activity level was used to set
the predetermined OH rate(s).

Two factors that causes over application and under application of OH -independently or jointly:

1. Cost differences
2. Utilization differences

Independent effects of the differences (or for similar differences related to variable OH) are as follows:

PredetermActual FOH Cost Expected FOH Cost = Underapplied

FOH Actual FOH Cost Expected FOH Cost = Overapplied FOH

Actual Utilization Expected Utilization = Overapplied FOH Actual Utilization

Expected Utilization = Underapplied FOH ined Overhead rates and Capacity

High-low Method and Least squares Regression

Predetermined overhead rated and Flexible budgets

Absorption and Variable Costing

Changing Sales or Production Levels in Absorption and Variable Costing

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