Factory Overhead Practical Problems and Solutions

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Factory Overhead Application Methods

Problem No. 1

The IQIZ Company estimated its factory overhead of the next period at $160,000. It is estimated that 40,000 units will be produced at a materials cost of $200,000. Production will require 40,000 man-hours at an estimated wage cost of $80,000. The machines will run about 25,000 hours.

Required: The factory overhead rate that may be used in applying FOH to production on each of the following bases:

(1). Materials cost
(ii). Direct labour cost
(iii). Direct labour hours
(iv). Machine hours
(v). Units of production
(vi). Prime cost

Solution

Factory Overhead Applied Rates:

(1). Material Cost Basis

Formula: 

= (Estimated Factory Overhead / Estimated Material Cost) x 100

= ($160,000 / $200,000) x 100

= 80%

(ii). Direct Labour Cost Basis

Formula:

= (Estimated FOH / Estimated DL. Cost) x 100

= ($160,000 / $80,000) x 100

= 200%

(iii). Direct Labour Hours Basis

Formula:

Also Check:  Selling and Distribution Overheads

= (Estimated FOH / Estimated DL. Hours) x 100

= $160,000 / 40,000 hrs.)

= $4.00 per hour

(iv). Machine Hours Basis

Formula:

= Estimated FOH / Estimated Machine Hours

= $160,000 / 25,000 hrs.

= $6.40 per machine hour

(v). Units of production cost

Formula:

= Estimated FOH / Estimated No. of units

= $160,000 / 40,000 hours

= $4.00 per unit

(vi). Prime Cost Basis

Formula:

= Estimated FOH / Estimated Prime Cost

= ($160,000 / ($200,000 + 80,000)) x 100

= 89%

FOH Variances

Problem No. 2

Factory Overhead for the King Manufactures Company has been estimated as follows:

Fixed Overhead = $15,000
Variable Overhead = $45,000
Estimated Direct Labour Hours = 20,000

Production for the month reached 75% of the budget, and actual factory overhead totalled $43,000.

Required:

(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances

Solution

Working

FOH Applied Rate:

Formula:

= FOH Applied for Normal Capacity / Normal Capacity

= $60,000 (15,000 + 45,000) / 20,000 hrs.

= $3 per hour

Applied FOH for actual capacity or capacity attained:

Formula:

= Actual Capacity x FOH hrs. x $3

= (20,000 x 75%) x $3

= 15000 hrs. x $3

= $45,000

Budgeted Allowance:

Formula:

= Fixed Cost + Variable Cost for actual capacity

= $15,000 + 33,750*

= $48,750

* Variable Cost for Actual Capacity:

Formula:

= Actual Capacity x Variable Cost Rate

= 15,000 x $2.25*

= $33,750

* Variable Cost Rate:

Formula:

= Variable Cost for Normal volume / Normal Volume

= $45,000 / 20,000 hrs.

Also Check:  Predetermined Overhead Rate

=$2.25 per hour

Req. (a) Over or under Applied FOH:

Factory Overhead Practical Problems and Solutions

Variances

Spending Variances

Factory overhead variances calculations

Capacity Variance

Capacity variance Calculations

Check

Variance Check

Low and High Point Method

Problem No. 3

The John & Co.’s burden rate is $2.00 per hour. Budgeted overhead for 3,000 hours per month is $8,000 and at 7,000 hours is $12,000. Actual factory overhead for the month was $9,000 and actual volume was 5,000 hours.

Required:

(1). Variable overhead in burden rate
(2). Budgeted fixed overhead
(3). Normal volume
(4). Applied overhead
(5). Over or under absorbed overhead
(6). Idle capacity variance
(7). Spending variance

Solution

Activity LevelBudgeted FOH
(Hrs.)($)
7,00012,000
3,0008,000
4,0004,000

(1). Variable Cost Rate/V.C. in burden rate

Formula:

= Difference in burden FOH / Difference in activity level

= $4,000 / 4,000 hrs.

= $1 per hour

(2). Budgeted Fixed Overhead

 

Budgeted FOH for 7,000 hrs.$12,000
Less V.C. for 7,000 hrs. (7,000 x 1)$7,000
Fixed Cost$5,000
OR
Budgeted FOH for 3,000 hours$8,000
Less V.C. for 3,000 hours (3,000 x 1)$3,000
Fixed Cost$5,000

(3). Normal Volume/Standard Activity Level

Formula:

= Fixed FOH Cost / Fixed FOH Cost Rate

= $5,000 / $1

= 5,000 Hrs.

(4). Applied Factory Overheads

Formula:

= Actual Capacity x FOH Applied Rate

= 5,000 x 2

= $10,000

(5). Over or Under Absorbed FOH

Applied FOH for Capacity Attained$10,000
Less Actual FOH$9,000
Over Applied FOH$1,000
Also Check:  Apportionment of overhead expenses

Variances

(6). Capacity Variance

FOH Applied for capacity attained$10,000
Less budget Allowance$10,000

(7). Spending Variance

Actual FOH$9,000
Less Budgeted Allowance$10,000
1,000 (Favourable)

Check

Low & High Point Method Check

Computation:

Fixed FOH Rate
Applied Burden Rate$2.00
Less Variable Rate$1.00
Fixed Burden Rate$1.00

Budgeted Allowance

Fixed Cost + Variable Cost for Capacity Attained

5,000 + (5,000 x 1)

5,000 + 5,000

= $10,000

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