Question

I am trying to determine factory overhead for a manufacturing company and also trying to figure out what accounts I need to use to calcuclate it. I am stuck on two...1.) Accumulated Depreciation- Factory buildings and equipment and 2.) Depreciation Expense- Factory buildings and equipment. Would I use both accounts in determining factory overhead or only one? Would Accumulated Depreciation be used for overhead and Depreciation Expense be put under operating expenses on the income statement? Or as I said earlier, would they both be used to determine factory overhead since they are specifically "Factory builidngs and equipment"?

Answer 1

Accumulated depreciation is a balance sheet item. It is not an expense. Accumulated depreciation will be net off from the property, plant and equipment (or fixed assets) gross block in the balance sheet. Fixed assets gross value less accumulated depreciation provides the net value of PPE or fixed assets in the balance sheet

Depreciation on factory building and equipment is a facotry overhead. Depreciation on other assets like car or office building would form a part of operating expenses. As facotry buidling and equipment are used in manufacturing process, the associated depreciation would be a manufacturing overhead.

The relation between depreciation and accumulated depreciation can be explained in very simple terms as follows:

When depreciation is charged, the following accounting entry is passed

Trust the above is clear. If not, comment with specific points. Happy to calrify any further doubts