Manufacturing costs other than direct materials and direct labor are known as manufacturing overhead

(also known as factory overhead). It usually consists of both variable and fixed components. Examples of
manufacturing overhead cost include indirect materials, indirect labor, depreciation, salary of production
manager, property taxes, fuel, electricity, grease used in machines, and insurance etc.
Unlike direct materials and direct labor, manufacturing overhead is an indirect cost that cannot be directly
assigned to each individual job. This problem is solved by using a rate that is computed at the beginning
of each period. This rate is known aspredetermined overhead rate.

Application of manufacturing overhead:

As stated earlier, the predetermined overhead rate is computed at the beginning of the period and is used
to apply manufacturing overhead cost to jobs throughout the period.
Manufacturing overhead cost is applied to jobs as follows:

Example:
Suppose the GX company has completed a job order. The time tickets show that the workers have
worked for 27 hours to complete the job. The predetermined overhead rate computed at the beginning of
the year is $8 per direct labor hour. The manufacturing overhead cost would be applied to this job as
follows:

= $8.00 27 DLH
= $216
The manufacturing overhead cost assigned to the job is recorded on the job cost sheet of that particular
job.

Journal entry to record manufacturing overhead cost:

The manufacturing overhead cost applied to the job is debited to work in process account. The journal
entry for the applied manufacturing overhead cost, computed in the above example, would be made as
follows:
Work in process
Manufacturing overhead

216
216

The reason of using a predetermined overhead rate rather than actual

overhead costs:
Notice that the procedure of manufacturing overhead application described above is based on an
estimated overhead rate (predetermined overhead rate). The manufacturing overhead cost applied to the
job is, therefore, not actual manufacturing overhead cost incurred by the job. The reason is that the total
actual manufacturing overhead costs are usually not known to managers before the end of the year. The
application of manufacturing overhead based on a predetermined overhead rate helps in computing cost
of goods sold of a particular job before it is shipped to the customer.
The use of predetermined overhead rate to apply manufacturing overhead cost to products or job orders
is known as normal cost system.