# 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:

### Variances

Spending Variances

Capacity 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
(5). Over or under absorbed overhead
(6). Idle capacity variance
(7). Spending variance

Also Check:  Apportionment of overhead expenses

### Solution

 Activity Level Budgeted FOH (Hrs.) (\$) 7,000 12,000 3,000 8,000 4,000 4,000

#### (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

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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