MANUFACTURING
OVERHEAD
TOPIC 5
WHAT WILL YOU LEARN:
1 MANUFACTURING OVERHEAD
CONCEPT
COMPARISON AMONG ACTUAL COSTING
2 SYSTEM, NORMAL COSTING SYSTEM AND
STANDARD COSTING SYSTEM
NORMAL COSTING SYSTEM
3
5.1 DEFINITION OF
MANUFACTURING OVERHEAD
❑ All manufacturing costs other
than direct materials and direct
labour costs
❑ Overhead costs are recognized as
indirect manufacturing costs
❑ Example : indirect raw material,
plant rental, indirect labour, plant
utility, plant insurance
5.1.1 CONCEPT OF
MANUFACTURING OVERHEAD
1. Actual overhead
2. Budgeted / Estimated
overhead
3. Applied overhead
ACTUAL OVERHEAD
❑ Total amount of manufacturing
costs actually involved in production
for certain period of time.
❑ Example : telephone, electricity and
water expenses and etc.
❑ The actual expenses (amount) will
only be known when we received
the bills.
BUDGETED / ESTIMATED
OVERHEAD
❑ Planned or expected manufacturing
overhead costs for the future because
actual overhead cost is still unknown.
❑ Example : Syarikat Awal Sdn Bhd make an
estimation of overhead such as :
Supervisor salary RM 100,000
Plant depreciation RM 7,500
Machine repair RM 25,000
APPLIED OVERHEAD
❑ Estimated manufacturing overhead
costs based on actual activity.
❑ Formula :
Applied overhead = Predetermined overhead rate
(POR) X Basis of activity
❑ Differences between the actual
overhead costs and the applied
overhead costs will be known as
over- or under-applied overhead.
5.2 COMPARISON AMONG ACTUAL COSTING SYSTEM, NORMAL
COSTING SYSTEM AND STANDARD COSTING SYSTEM
ACTUAL NORMAL STANDARD
COSTING COSTING COSTING
Taking into Taking into Taking into
account the account the account the
actual cost of actual cost of standard cost of
direct materials, direct materials, direct materials,
actual cost of actual cost of standard cost of
direct labour, direct labour, direct labour,
and actual cost and applied and standard
of manufacturing manufacturing costs of
overhead. overhead cost. manufacturing
overhead.
5.2.1 ADVANTAGES OF NORMAL COSTING
COMPARED TO ACTUAL COSTING
❑ Product price can be determined
in advance.
❑ The product costs will remain the
same for a time period because
it uses the same overhead rate.
(Actual costing system is for
reporting purposes)
5.3 NORMAL COSTING SYSTEM
❑ Manufacturing overhead costs were
absorbed/applied into products using
Predetermined Overhead Rate (POR)
❑ POR Formula :
Predetermined Estimated Manufacturing
Overhead Rate = Overhead costs
(POR) Estimated basis of
activity
5.3.1 BASIS ACTIVITY TO COMPUTE
PREDETERMINED OVERHEAD RATE
❑ Direct labour hours (DHL)
❑ Direct labour costs (DLC)
❑ Machine-hours (MH)
❑ Direct materials costs (DMC)
❑ Production units (PU)
EXAMPLE 1
Syarikat Seri Bayu manufactures two types of products called Din and
Don. At the beginning of 2019, the Factory manager provided the
estimated information as follows :
Manufacturing overhead RM500,000
Machine – hours 200,000 hours
Direct labour 100,000 hours
Direct labour costs RM650,000
Direct raw material costs RM450,000
Production unit 75 000 units
Required :
Compute the predetermined overhead rate (POR) based on the
following basis activities :
a)Machine – hours d) Direct raw material costs
b)Direct labour hours e) Production units
c)Direct labour costs
SOLUTIONS EXAMPLE 1 : a)
POR (MH) = ESTIMATED MANUFACTURING OVERHEAD
ESTIMATED BASIS ACTIVITIES
= RM 500,000/ 200,000 MH
= RM 2.50/MH
SOLUTIONS EXAMPLE 1 : b)
POR (DLH) = ESTIMATED MANUFACTURING OVERHEAD
ESTIMATED BASIS ACTIVITIES
= RM 500,000/ 100,000 DLH
= RM 5.00/DLH
SOLUTIONS EXAMPLE 1 : c)
POR (DLC) = ESTIMATED MANUFACTURING OVERHEAD
ESTIMATED BASIS ACTIVITIES
= (RM 500,000/ RM650,000) x 100
= 76.92%
SOLUTIONS EXAMPLE 1 : d)
POR (DMC) = ESTIMATED MANUFACTURING OVERHEAD
ESTIMATED BASIS ACTIVITIES
= (RM 500,000/ RM450,000) x 100
= 111.11%
SOLUTIONS EXAMPLE 1 : e)
POR (PU) = ESTIMATED MANUFACTURING OVERHEAD
ESTIMATED BASIS ACTIVITIES
= RM 500,000/ 75,000 units
= RM 6.67/units
5.3.2 DETERMINATION OF PRODUCT COSTS
PER UNIT USING NORMAL COSTING
RM
Actual Direct Material xx
Actual Direct Labour xx
Applied Manufacturing Overhead xx
Product cost per unit xxx
VARIOUS PREDERTEMINED
OVERHEAD RATE (POR)
❑ Predetermined overhead rate can be
different for each :
❑ Department
❑ Segment or
❑ Products
❑ Example :
❑ Department A uses machine hours as
the activity base and Department B uses
direct labour costs basis.
EXAMPLE 2
Syarikat Pertiwi have two departments, which are Cutting Department
and Assemble Department to produce Satria. The company uses
various predetermined overhead to compute manufacturing overhead
for each department.
Cutting Department : based on Direct Material Costs
Assemble Department : based on Direct Labour Hours
These estimated information has given by the company for 2018 :
Cutting Assemble
Department Department
Direct materials Costs RM250,000 RM43,000
Manufacturing Overhead RM165,000 RM155,000
Direct Labour Hours 16,000 hours 5,000 hours
Machine Hours 1,000 hours 2,200 hours
Calculate the predetermined overhead rate (POR) for each department.
SOLUTIONS EXAMPLE 2 :
❑Cutting Department :
Predetermined Overhead Rate (DMC) :
= Estimated Manufacturing Overhead x 100
Estimated Direct Materials Costs
= RM (165,000 / 250,000) x 100
= 66%
❑Assemble Department :
Predetermined Overhead Rate (DLH)
= Estimated Manufacturing Overhead
Estimated Direct Labour Hours
= RM155,000 / 5000 hours
= RM31.00 / hour
EXAMPLE 3
For September 2018, these are the data
found regarding manufacturing cost:
Department X Department Y Department Z
Direct RM 140 000 RM 126 000 RM 78 000
Materials
Direct Labour RM 120 000 RM 110 000 RM 37 500
Costs
Manufacturing RM 98 000 RM 129 000 RM 80 000
Overhead
Direct Labour 8 000 hours 11 000 hours 3 500 hours
Hours
Machine 34 000 hours 45 000 hours 10 400 hours
Hours
Each department uses different basis to
determine applied overhead. Department X is
based on 65% of direct material cost,
department Y is based on 95% of direct
labour cost while department Z is based on
RM7.99 per machine hour.
Required:
Calculate the applied manufacturing overhead
for each department.
SOLUTIONS EXAMPLE 3
APPLIED MANUFACTURING OVERHEAD
= POR X Actual basis activity
DEPARTMENT Calculation
X 65% X RM 140 000= RM 91,000
Y 95% X RM 110 000= RM 104,500
Z RM 7.99 X 10 400 machine hour
= RM 83,096
5.3.3 OVER-APPLIED OVERHEAD
AND UNDER-APPLIED OVERHED
Differences between the applied
manufacturing overhead and the actual
manufacturing overhead can be:
Over-applied Under-applied
Overhead Overhead
Applied Overhead > Actual Overhead
Applied Overhead < Actual Overhead
EXAMPLE 4
Malim Enterprise estimated manufacturing
overhead cost to be RM1,200,000 for the
year 2019. While actual overhead costs for
2019 is RM1,180,000. Basis of activity used
are stated below:
Basis Activities Estimation Actual
Direct Labour RM2,000,000 RM2,100,000
Costs
Direct Labour 180,000 hours 190,000 hours
Hours
Machine Hours 200,000 hours 192,000 hours
Required :
a)Calculateover-applied or
under-applied overhead for
each basis.
SOLUTIONS EXAMPLE 4 :
Step 1: Determine POR
Direct Labour Costs = RM1,200,000 X 100%
RM2,000,000
= 60%
Direct Labour Hours = RM 1 200 000
180 000 Hours
= RM 6.67/ Hours
Machine Hours = RM 1 200 000
200 000 Hours
= RM 6.00/Hours
STEP 2 :
a) Calculate Applied Manufacturing Overhead
Direct Labour Cost = 60% x RM 2,100,000
= RM 1,260,000
Direct Labour Hours = RM 6.67 X RM 190,000
= RM 1,267,300
Machine Hours = RM 6.00 X RM 192,000
= RM 1,152,000
SOLUTIONS EXAMPLE 4
a) Manufacturing overhead over/ under
applied
Basis Applied Actual Over/
Activities Overhead Overhead under
applied
Direct Labour RM 1,260,000 RM 1,180,000 Over-applied
Costs RM 80 000
Direct Labour RM 1,267,300 RM 1,180,000 Over-applied
Hours RM 87 300
Machine Hours RM 1,152,000 RM 1,180,000 Under-applied
RM 28 000
Past year question (PSPM)
❖ Explain two (2) advantages of using
applied overhead compared to actual
overhead. [3m]
❖ Explain the differences between actual
costing, normal costing and standard
costing based on product cost components
: direct material, direct labour and
manufacturing overhead. [4m]
THANK YOU
