Question

Week 4 - Discussion Question cation dance What is the characteristic of factory overed that requires us to estimate Why must we decide on a rate o Postshod be w ritten in a concise read and professional manner s ety Following your post.please respond to one of your fellow students. Your response should be on their summary te specific post his head post with a contrato other Your initial post is due by midnight on Friday day You must then flower Tuesday day other Unread Relea s ible to those who have posted at least one reply

Answer 1

Factory overheads are FIXED IN NATURE, due to which it's allocation to the product produced is difficult. For example a company A is a bag producing company. The direct material and direct labor cost can be traced directly but the factory overheads cannot be traced on the basis of per bag produced. For example the electricity cost, depreciation of fixed assets, watchman's salary etc. Cannot be traced on the basis of per unit produced by an entity.Thus, the fixed nature (not being able to get allocated on the basis of units produced) of factory overhead make the allocation of such cost difficult.

However such estimate is important for every entity for the following reasons :

1 For making decisions

Like produce or buy decisions, taking up of large orders at low selling price, etc in above cases only direct material and direct labor cost is not enough to take decision, factory overheads shall also be considered.

2 Compliance of U.S. GAAP

It requires that direct material, direct labor and factory overheads shall all be considered for inventory valuation.

3 For setting standards

By setting standards we will be able to ensure effective and efficient use of all available resources.

We must decide on a rate of allocation of factory overheads in advance because then only we will be able to set a reliable standard of the factory overheads in advance to compare with the actual factory overheads and thus ensure efficient use of resources. The rate can be predetermined on the basis of a number of variables like labor hours, machine hours etc. Moreover a new method of ABC costing has also come up which provides allocation of factory overheads.