WEEK 1 DISCUSSION

WEEK 1 DISCUSSION

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WEEK 1 DISCUSSION

Overhead:

Overhead costs is necessary to run a business but it cannot be applied directly to the particular business activity, goods, or services. There are various reasons where overhead can be under-applied. For instance, lack of control over the spending of overhead leads to the increase in actual costs of overhead than the estimated costs of overhead. If there is a fixed amount of some of the overhead and estimated amount of the allocation base at the starting of the period turns out to be lower than the actual amount for the given period, the overhead will be under-applied. In addition, If balance is created in the overhead's control account to the sold goods, overhead can be prevented ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"oXigNzei","properties":{"formattedCitation":"\\super 1\\nosupersub{}","plainCitation":"1","noteIndex":0},"citationItems":[{"id":127,"uris":["http://zotero.org/users/local/mlRB1JqV/items/WH5UV9QH"],"uri":["http://zotero.org/users/local/mlRB1JqV/items/WH5UV9QH"],"itemData":{"id":127,"type":"webpage","title":"The Most Common Accounting Treatment of Underapplied Manufacturing Overhead","abstract":"Manufacturing overhead encompasses all manufacturing costs that are not attributed back to a specific job. Due to the difficulty of accurately predicting the amount of manufacturing overhead that will be used throughout the year, it is common to incur over- or underapplied manufacturing overhead at the fiscal year ...","URL":"https://smallbusiness.chron.com/common-accounting-treatment-underapplied-manufacturing-overhead-35027.html","language":"en","accessed":{"date-parts":[["2019",3,18]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} 1. This strategy indicates that productions’ actual cost was higher than the costs that were estimated for the traded goods. Therefore, the balance developed is credited to the amount of goods sold account. These are the prominent manifestations pertinent to the instances where overhead is under-applied.

Predetermined Overhead:

The predetermined overhead rate is estimated to apply overhead to the work/job. It can be calculated when the estimated cost of manufacturing overhead at the start of every period is divided by the allocation base (direct labor hours is the most common allocation base) and the calculated value will be known as the predetermined overhead rate ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"Jv5A5z8z","properties":{"formattedCitation":"\\super 2\\nosupersub{}","plainCitation":"2","noteIndex":0},"citationItems":[{"id":129,"uris":["http://zotero.org/users/local/mlRB1JqV/items/G6Z2LD8D"],"uri":["http://zotero.org/users/local/mlRB1JqV/items/G6Z2LD8D"],"itemData":{"id":129,"type":"webpage","title":"How to Calculate Predetermined Overhead Rate Machine Hours","abstract":"Dividing overhead costs by the number of hours your machinery is used gives you the basis of determining overhead rate machine hours. The rate is used to identify the expected costs of machine production, which allows the business to properly allocate the financial resources for operations.","URL":"https://smallbusiness.chron.com/calculate-predetermined-overhead-rate-machine-hours-38399.html","language":"en","accessed":{"date-parts":[["2019",3,18]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} 2. Therefore, the formula for calculating predetermined overhead would be:

= Estimated total manufacturing overhead cost÷Estimated total amount of the allocation base

It is imperative to mention that this formula is based primarily on estimates. In other words, the predetermined overhead rate is the rate of allocation base which is applied to find out the manufacturing overhead cost to the cost goods for a specific period of reporting. Predetermined overhead rate is usually used to support in accounts or books closing faster. The bottom line is that predetermined overhead.

References

ADDIN ZOTERO_BIBL {"uncited":[],"omitted":[],"custom":[]} CSL_BIBLIOGRAPHY 1. The Most Common Accounting Treatment of Underapplied Manufacturing Overhead. https://smallbusiness.chron.com/common-accounting-treatment-underapplied-manufacturing-overhead-35027.html. Accessed March 18, 2019.

2. How to Calculate Predetermined Overhead Rate Machine Hours. https://smallbusiness.chron.com/calculate-predetermined-overhead-rate-machine-hours-38399.html. Accessed March 18, 2019.