What are the causes of forecasting and estimating overhead?
In general, the reasons for forecasting and estimating overhead are mentioned below.
1- The difference between the amount of actual production and the planned production
2- Uncertainty of the actual amount of some overhead costs
3- Creating suitable conditions for comparing actual and projected costs
1- Why does the difference between the amount of actual production and planned production lead to overhead forecasting?
You know that in manufacturing institutions, the number of production is predicted at the beginning of the period (planned production), but practically there are differences between the actual production and the planned production, that the actual production may be more than the planned production or less than be it
Therefore, since the actual production number is not known at the beginning of the period, the share of the overhead cost of a unit of production is also not known. As a result, during the financial period, the cost price of a unit of goods cannot be determined due to the fact that its third component (overhead) is not known.
Consider the example below
The depreciation cost of the Aban factory building is 2,800,000 Rials and the planned or predicted production is 8,000 pieces, which in practice and reality can happen in the following 3 cases:
You can see that with the change in the number of production shares of each unit of produced goods from the cost, the overhead changes. Therefore, since the number of production is variable, the cost price cannot be determined based on the actual overhead at the beginning of the financial period.
2- Why is the actual amount of some overhead expenses not known and it leads to overhead forecasting?
We explain the reason for the uncertainty of the actual amount of some overhead costs at the end of the financial period by giving some examples. For example, how can the industrial electricity costs of a workshop whose bill has not been received at the end of the financial period be determined, or the gas consumption cost of a factory whose bill has not been received at the end of the financial period can be determined, so it is clear for reasons such as As mentioned, it is not possible to specify the actual overhead, so it is necessary to predict the overhead costs (consumed electricity, gas, etc.).
3- How does overhead forecast create a suitable basis for comparison?
By forecasting overhead, managers create a standard for comparing actual costs and what is predicted. That is, in fact, at the end of the financial period or at any time, they can have a comparison between what should have been done and what was actually done. Therefore, by following up on differences and analyzing them, they can see the strengths and weaknesses of their activities.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
Group of accountants, auditors, Tabriz
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