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:
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 $9,000 and actual volume was 5,000 hours.
Required:
(1). Variable overhead in burden rate
(2). Budgeted fixed overhead
(3). Normal volume
(4). Applied overhead
(5). Over or under absorbed overhead
(6). Idle capacity variance
(7). Spending variance
Solution
Activity Level | Budgeted FOH |
(Hrs.) | ($) |
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 |
0 |
(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