### Cost Accounting

#### Calculating Job Order Costing Using Overhead Rates

When calculating the cost of an individual product or batch it can be sometimes difficult to calculate the factory overhead due to their indirect nature. As a result, factory overheads are often linked to a unit such as labour hours or machine hours.

###### Using Overhead Rates in Job Order Costing Example

TelePeople, are a telephone manufacturing company that produces landline phones. The following costs have been given for the production of a batch of 200 phones.

• Direct materials - 250kg of material at \$20 a kg

• Direct Labour - 100 hours at \$25 an hour

• Factory overheads for the year were \$175,000 and are linked to direct labour hours.

• Direct labour hours for the year was 25,000 hours

Find the Cost of producing one batch of 200 phones.

Step 1: Calculate the Direct Material

Direct material = 250 * \$20 = \$5000

Step 2: Calculate the Direct Labour

Direct labour = 100 * \$25 = \$2500

Step 3: Calculate the Factory Overhead Rate

In this example, the factory overhead rate is linked to direct labour hours. We are given the factory overheads for the year and the direct labour hours used for the year. By dividing the direct labour hours used in the year by the factory overhead, we can determine the factory overhead per direct labour hour.

Factory overhead per year = \$175,000

Direct labour hours per year = 25,000

Factory overhead per direct labour hour:

= \$175,000/25,000

= \$7 per direct labour hour

Step 4: Calculate the Factory Overhead per Batch

We know that 100 direct labour hours were used in the batch of 200 phones. To find the factory overhead, multiply the factory overhead rate by the direct labour hours used in the batch.

= \$7 * 100

=\$700

Step 5: Put it Together

Cost of Per Batch

Direct Material           \$5000

Direct Labour             \$2500