ACCOUNTING FOR FACTORY OVERHEAD

There are two accounts used- factory overhead control and factory overhead applied. Factory
overhead control is used to accumulate actual overhead incurred, while factory overhead applied is
used to accumulate estimated factory overhead applied to production. For factory overhead applied to
production, a predetermined rate is used and this is computed using any of the following as a base:

1. Units of production
2. Direct material cost
3. Direct labor hours
4. Direct labor costs
5. Machine hours

The predetermined factory overhead rate computed may be used for all departments in the
company (blanket rate) or a rate may be computed for each department to fit the nature of the
operations of the department (departmentalized rate.)

Estimated factory overhead (Factory overhead applied) is used even if there is actual factory
overhead because at the time the overhead is needed for costing of jobs completed, the actual
overhead is not yet available (the actual will be known only at the end of the month). The computation
of the cost of each job will be done upon the completion of the job and this may be during the first
week, second week, or third week of the month, and this time, the actual overhead is not yet available
because some items included in the actual overhead will be known at the end of the month.

As items in the factory overhead control account are incurred, the Factory Overhead Control
account is debited. The applied factory overhead entered on the job order cost sheet for each job is the
basis for the following entry:

Work in Process xxx

Applied Factory Overhead xxx

An entry is made on the cost sheet- factory overhead section

Some actual overhead costs, such as indirect materials, indirect labor, and payroll taxes, are
debited to Factory Overhead Control as they are incurred. Other overhead costs, such as depreciation
and expired insurance are debited to Factory Overhead Control when adjusting entries are recorded.

The controlling account for accumulating the indirect charges incurred in production is:
 MANUFACTURING OVERHEAD CONTROL

1. Cost of indirect materials and supplies 1. Total debit footing at the end of the
issued from the warehouse at the same accounting period when closing the
time crediting materials. books.
2. Cost of indirect labor at the same time
crediting payroll.
3. Cost of indirect expenses purchased
from outsiders.
4. Cost of other indirect expense incurred
by the company.

Manufacturing overhead applied- account used for accumulating the total overhead charged to
production during the period.

MANUFACTURING OVERHEAD APPLIED

1. Total Credit footings at the end of the 1. Cost of overhead allocated to

accounting period upon closing of the production and computed by
books multiplying the actual factor being used
during the period by the predetermined
rate, at the same time, debiting work in
process.

Over/under applied overhead- the difference between the actual overhead incurred and the applied
overhead.

OVER/UNDER APPLIED OVERHEAD

1. Difference between the actual 1. Difference between actual

manufacturing overhead and the manufacturing overhead and the
applied overhead when actual is more applied overhead when the applied is
applied. more than actual.