Factory Overhead Practical Problems and Solutions

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:

= (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:

Also Check:  Predetermined Overhead Rate

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.

=$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

Also Check:  Apportionment of overhead expenses

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

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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