Definition of Rate per Standard Hour
In accounting, the term “Rate per Standard Hour” refers to a basis used in absorption costing to allocate manufacturing overhead to products. The formula for Rate per Standard Hour is as follows:
\[ \text{Rate per Standard Hour} = \frac{\text{Total Manufacturing Overhead}}{\text{Total Standard Hours of Production}} \]
This rate helps in distributing manufacturing overhead costs to the units produced, ensuring that each unit carries a fair portion of the overhead.
Absorption costing is a method where all manufacturing costs, including fixed and variable overheads, are absorbed by the units produced.
In contrast, activity-based costing (ABC) uses multiple allocation bases, often cost drivers, that more accurately assigns overhead based on the activities consuming resources.
Examples
-
XYZ Manufacturers:
- Total Manufacturing Overhead: $50,000
- Total Standard Hours: 10,000 hours
- Rate per Standard Hour = $50,000 / 10,000 = $5 per standard hour
-
ABC Enterprises:
- Total Manufacturing Overhead: $75,000
- Total Standard Hours: 15,000 hours
- Rate per Standard Hour = $75,000 / 15,000 = $5 per standard hour
Frequently Asked Questions (FAQs)
What is manufacturing overhead?
Manufacturing overhead includes all indirect costs associated with manufacturing a product. These costs can include indirect materials, indirect labor, maintenance, utilities, and factory rent.
How is Rate per Standard Hour different from activity-based costing?
Rate per Standard Hour uses a single allocation base (standard hours) for assigning overhead, while activity-based costing uses multiple cost drivers to allocate overhead more precisely based on actual activities that consume resources.
Why is Rate per Standard Hour important in absorption costing?
This rate ensures that all manufacturing overhead costs are fairly distributed to each unit produced, giving a more accurate picture of product costs and helping in pricing, inventory valuation, and profitability analysis.
Can Rate per Standard Hour be used in service industries?
Though more commonly used in manufacturing, the concept can be adapted for service industries by equating the “standard hours” to standard time taken for service provision.
What happens if standard hours are not accurately estimated?
Inaccurate estimation of standard hours can lead to improper absorption of overhead costs, causing product cost distortions and potentially misleading management decisions.
Related Terms
Absorption Costing
A costing method that includes all manufacturing costs, both fixed and variable, in the cost of a unit of product.
Manufacturing Overhead
All indirect manufacturing costs that are necessary for manufacturing a product but are not directly traceable to specific units of product.
Cost Units
The units of production or service against which costs are figured and absorbed.
Activity-Based Costing (ABC)
A method of assigning overhead and indirect costs—such as salaries and utilities—to products and services based on the activities required to produce them.
References
- Investopedia: Absorption Costing
- Accounting Coach: Manufacturing Overhead
- Investopedia: Activity-Based Costing
Suggested Books for Further Study
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren
- “Managerial Accounting for Managers” by Eric Noreen
- “Introduction to Management Accounting” by Charles Horngren, Gary Sundem, and William Stratton
Accounting Basics: “Rate per Standard Hour” Fundamentals Quiz
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