## 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 |

#### (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