Chapter 19, Problem 1DQ

To determine

Introduction:

Factory overheads are the overheads which are involved in operations of a factory. These are the overheads incurred in the factory other than the costs of direct materials and direct labour. Therefore, they are also known as indirect costs involved in a production process.

Here, in the problem provided to us we are required to ascertain the reason as to why a company assigns the amount of factory overheads to individual jobs or job lots.

Answer to Problem 1DQ

Solution:

As per the accounting principles, direct materials cost, direct labour costs and factory overhead are all part of the cost of a product during inventory valuation. However, costs such as selling and marketing costs etc. are not part of the inventory valuation and are directly reported in the income statement.

Factory overheads generally include factory rent, factory depreciation, factory supervisor's salary etc. and therefore it is very difficult for the accountants to assign all these costs to individual jobs or job lots since they are not directly related to production process.

Explanation of Solution

As mentioned above that assigning overheads such as factory rent, factory depreciation etc is a difficult task, but their assignment is also important in order to find out the total inventory valuation and cost of goods sold. Rather these overheads are usually predetermined and assigned to jobs so that we can determine the job's total cost in advance which can help the management in taking many important decisions such as the sale price of the product, desired profit margin, costs which can be reduced etc.

And therefore, the company or an organisation must estimate the amount of factory overheads to individual job or job lots.

Conclusion

Hence, assignment of factory overheads to individual job or job lots helps the management in taking important decisions such as price of the product, desired profit margin etc.