How do we apply Manufacturing Overhead Cost such as indirect materials, indirect labor, equipment depreciation, maintenance and utilities that are factory related to the conversion of raw material to a finished good. We wish for these cost to be added to the direct material and direct labor so that we end up with a Total Product Cost comprised of Direct Material, Direct Labor and Manufacturing Overhead.
There are several ways of doing it depending on your situation and what your accountant wants you to do. I'm not an accountant so I won't dig into that aspect.
In general, you can either allocate an estimate or specific amounts.
You can create "service" or "other charge" items that represent an estimate of your overhead charges and add them to the BOM. Then when you build the assembly some of the cost of those overhead costs are moved into the inventory asset value of the item.
You can do a "value" inventory adjustment to increase the inventory asset value of the assembly items to take costs out of the overhead cost accounts and move them into specific assemblies. This way you can pick specific costs that change each time, rather than an estimate.
Lots of reasons to do it either way, depending on your situation.
Thank you for your answer Charlie. I understand the first part of your answer but I'm not clear on this second part.
"You can do a "value" inventory adjustment to increase the inventory asset value of the assembly items to take costs out of the overhead cost accounts and move them into specific assemblies. This way you can pick specific costs that change each time, rather than an estimate."
Could you elaborate or provide an example.
Thank you,
Damon
You can read this article for information on inventory adjustments .
Let's say you manufacture an item for a material cost of $10 for one item (to make it very simple). Also that you don't have any on hand prior to this build. The average cost of the item is $10, the total inventory asset value for the item is also $10. If you want to assign some other cost to this, such as a portion of your overhead, you can do a value adjustment. If you want to add $1.00 of your overhead cost to the item, you would do a value adjustment and keep the quantity at 1, but change the value of the item to be $11.00 instead of $10.00. You would pick an adjustment account that would be the source of that overhead cost.
That is an extremely simplified example, does that make sense?
Hi Charlie,
Yes, this makes sense to me.
Thank you,
Damon
