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There are no definitive rules for determining the base used to calculate factory overhead rates. The method chosen should have a direct relationship to overhead costs and be simple to compute and apply. The factory overhead rate is calculated by dividing estimated overhead costs by the estimated normal activity level of the chosen base. Common bases used include units produced, direct materials cost, direct labor cost, direct labor hours, and machine hours.

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Giezamille N. Sanchez
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16 views

VV VVVVVVVVVVVV VVVVVVV VV VVVVVVVVVV VV: ! "! !# $!% &%# ""'!' %! %V V !V "#V $%"&' "V

There are no definitive rules for determining the base used to calculate factory overhead rates. The method chosen should have a direct relationship to overhead costs and be simple to compute and apply. The factory overhead rate is calculated by dividing estimated overhead costs by the estimated normal activity level of the chosen base. Common bases used include units produced, direct materials cost, direct labor cost, direct labor hours, and machine hours.

Uploaded by

Giezamille N. Sanchez
Copyright
© Attribution Non-Commercial (BY-NC)
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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COMPUTING FACTORY OVERHEAD APPLICATION RATES

THERE ARE NO DEFINITIVE RULES FOR DETERMINING THE BASE TO USE AS THE DENOMINATOR ACTIVITY. HOWEVER, THERE
MUST BE A DIRECT RELATIONSHIP BETWEEN THE BASE AND FACTORY OVERHEAD COSTS.

ALSO THE METHOD USED TO DETERMINE THE

FACTORY OVERHEAD APPLICATION RATE SHOULD BE THE SIMPLEST AND LEAST COSTLY TO COMPUTE AND APPLY.

ONCE TOTAL FACTORY OVERHEAD COSTS HAVE BEEN ESTIMATED AND THE BASE CHOSEN, THE NORMAL CAPACITY ACTIVITY
LEVEL MUST BE ESTIMATED IN ORDER TO COMPUTE THE FACTORY OVERHEAD APPLICATION RATE.

THE FORMULA FOR COMPUTING THE FACTORY OVERHEAD APPLICATION RATE, WHICH IS THE SAME REGARDLESS OF THE
BASE CHOSEN, IS AS FOLLOWS:

FACTORY OVERHEAD APPLICATION RATE PER UNIT, HOUR, DOLLAR, ETC. = ESTIMATED FACTORY OVERHEAD COSTS [:] ESTIMATED BASE AT DENOMINATOR ACTIVITY Bases commonly used to compute the factory overhead application rate are: (1) units of production, (2) direct materials cost, (3) direct labor cost, (4) direct labor hours, and (5) machine hours. Lets go to the details.

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