Q12RQ - Horngren'S Financial And Managerial Accounting

Question

What are the two types of manufacturing overhead? How do they affect the manufacturing overhead budget calculations?

Step-by-Step Solution

Answer

Variable manufacturing overhead and Fixed manufacturing overhead are two types of manufacturing overhead. 

Step 1: Meaning of Manufacturing Overhead

Manufacturing overhead refers to costs that are indirect or not directly associated with the manufacturing process of a business entity. It is also known as factory overheads.

Step 2:Explanation of variable and fixed manufacturing overhead affect the manufacturing overhead budget calculations

Variable and fixed manufacturing overhead helps in calculating predetermined overhead allocation rates so that the overheads can be allocated appropriately. Ratios can be calculated and overheads can find out by applying such ratios. Overheads can be absorbed in labor hours. Being absorbed entity gets a pre-determined rate at which factory overheads would be absorbed.