General factory, shop floor rates and rates for cost centers...

Factory, shop floor and cost center rates

Under certain circumstances, enterprises can use a general factory (single) rate for the distribution of indirect costs, which is set for the entire enterprise. In this case, production overheads are not allocated to cost centers, but are made to order regardless of which department (shop) it was produced in. Thus, the general factory rate, calculated proportionally to the machine hours, can be used if only one type of equipment is used at the enterprise.

Limitations and possible inaccuracies inherent in the general plant rate are evident in the production of several orders (or dissimilar products), for which an uneven amount of labor and materials are spent, as they pass through various divisions and cost centers. In such circumstances, separate shop floor rates or cost center costs are required to more accurately calculate the cost of production.

Inclusion of permanent overhead costs in the cost of production or their cancellation to the cost of sales

An accurate calculation of the cost price of the order is required for various purposes, for example, for stock assessment, pricing, etc. The allocation of all production overheads to orders and types of products leads to ignoring the existing differences in the behavior of fixed and variable costs. There is an effect of averaging the fixed costs per unit of output for a given volume of production.

As a result of such a distribution, the cost price of an order is accurately calculated only for a specific volume of production. This problem has predetermined two approaches to accounting for permanent production overheads.

Supporters costing for variable costs consider all the fixed costs as the costs of the period. According to this approach, each income of this reporting period should cover the fixed costs of the same period. On this basis, permanent production overheads are not included in the valuation of inventories, but are written off in full to the cost of sales.

The calculation of the full cost price does not imply a difference between the production costs of the product and the costs for the period. According to this approach, all production costs are recognized as costs for the product, and therefore both fixed and variable production costs are included in inventories at the end of the reporting period. At the same time, part of the fixed overhead costs per unit of output depends on the volume of production, in proportion to which fixed costs are calculated and related to orders.

Despite the possibility of error in the part of costs, which are contained in the overhead costs allocated per unit of output, many enterprises widely use the full cost price. The calculation of the unit cost of production in many cases influences the pricing policy of the enterprise, as well as on the valuation of reserves and profits. Therefore, it is necessary to carefully choose the distribution base, which reveals the common links between the physical units of production and the causes that cause changes in overhead costs. Although theoretically changes in overhead can be caused by many factors.

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