In manufacturing companies with multiple production departments, it is important to allocate factory overhead costs appropriately to each department based on their usage. This is done by using a predetermined overhead rate for each department that reflects the costs incurred by that department.
To calculate the multiple production department factory overhead, follow these steps:
- Identify the total factory overhead costs for the period, including all indirect materials, indirect labor, and other indirect costs incurred in the manufacturing process.
- Determine the total number of direct labor hours or machine hours for each department for the same period.
- Calculate the predetermined overhead rate for each department by dividing the total factory overhead costs by the total number of direct labor hours or machine hours for that department.Predetermined Overhead Rate = Total Factory Overhead Costs / Total Direct Labor Hours or Machine Hours
- Allocate the factory overhead costs to each department using their predetermined overhead rate. Multiply the predetermined overhead rate by the actual number of direct labor hours or machine hours used in each department.Allocated Factory Overhead Costs = Predetermined Overhead Rate × Actual Direct Labor Hours or Machine Hours
- Add up the allocated factory overhead costs for all departments to get the total factory overhead costs for the period.
Here is an example:
ABC Manufacturing has two production departments: Department A and Department B. The total factory overhead costs for the period are $100,000. Department A has 5,000 direct labor hours and Department B has 3,000 direct labor hours for the same period.
The predetermined overhead rate for Department A is:
Predetermined Overhead Rate for Department A = $100,000 / 5,000 Direct Labor Hours = $20 per Direct Labor Hour
The predetermined overhead rate for Department B is:
Predetermined Overhead Rate for Department B = $100,000 / 3,000 Direct Labor Hours = $33.33 per Direct Labor Hour
To allocate the factory overhead costs, multiply the predetermined overhead rate by the actual number of direct labor hours used in each department:
Allocated Factory Overhead Costs for Department A = $20 per Direct Labor Hour × 5,000 Direct Labor Hours = $100,000
Allocated Factory Overhead Costs for Department B = $33.33 per Direct Labor Hour × 3,000 Direct Labor Hours = $100,000
The total allocated factory overhead costs for the period are $200,000.
By using this method, manufacturing companies with multiple production departments can accurately allocate their factory overhead costs and ensure that each department is charged appropriately for their usage of overhead resources.