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: …

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Important Techniques of Factory Overhead Costing

Factory Overhead Absorption Methods/Methods for FOH Application (1). Direct Material Cost Basis Direct Material Cost Basis = (Estimated FOH for the period / Estimated D.M. Cost) x 100 (2). D.L. Cost Basis D.L. Hours Basis = (Estimated FOH for the period / Estimated D.L. Cost) x 100 (3). D.L. Hours Basis (Estimated FOH for the …

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Predetermined Overhead Rate

What is predetermined overhead rate? – Definition: A predetermined overhead rate is an allocation rate that is given for indirect manufacturing costs that are involved in the production of a product or various products. It is used to estimate the manufacturing costs that will take place. The estimation takes place at the beginning of an …

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Computation of Machine Hour Rate

What is Machine Hour Rate? Machine hour rate represents the hourly cost of factory overhead for operating a particular machine and is obtained by dividing the factory expenses connected with a machine for a given period by the number of hours worked by the machine during that period. The Institute of Cost and Management Accountants, …

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Blanket Absorption Rate and Departmental Absorption Rate

Blanket Absorption Rate These terms are used in relation to the recovery or absorption of overhead. In ease, a common absorption rate for overhead is used throughout a factory and for all jobs and units of production irrespective of the department in which they were produced, it is termed as ‘blanket absorption rate‘. A common …

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Methods of Factory Overhead Absorption

The common methods applied for absorbing factory overhead are as follows: (1) Units of Output Method: Under this method, absorption of factory overhead is made on the basis of the number of units manufactured. The overhead rate is obtained by dividing the amount of overhead expenses by the number of units of output. Thus: Formula …

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Actual Overhead Rate and Pre-determined Overhead Rate

Overhead rates setup for the absorption of overhead may be divided into two parts: (1). Actual Overhead Rate, (2). Pre-determined Overhead Rate. Actual Overhead Rate Actual overhead rate is that which is based on the actual amount of overhead to be absorbed and the actual quantum or value of the base selected such as direct …

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Under-absorption and Over-absorption of Overhead

What is Under-absorption and Over-absorption of Overhead? Where the absorption of overhead is made by a rate based on actual data, the overhead absorbed must be equal to the actual overhead incurred. But where a pre-determined rate is employed, there is generally a difference between the overhead absorbed and the overhead incurred. If the absorbed …

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Selling and Distribution Overheads

Definition of Selling and Distribution Overheads According to the terminology adopted by the Institute of Cost and Management Accountants, England, the selling overheads constitute “the cost incurred in promoting sales and retaining customers“ and the distribution overheads constitute “the cost of the process which begins with making the packed product available for despatch and ends …

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Administrative Overheads

Introduction It is common practice to classify and separately collect the production, administrative, selling and distribution costs. The administrative overheads are related to office expenses. The selling and distribution expenses are related to marketing. All these expenses combined together give us the total selling cost. While accounting the production overheads and valuing the closing stock, …

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Departmentalization of Overheads

Definition Departmentalization of overheads refers to the process of determining overheadĀ costs of each department involved in the production. Explanation For the purpose of departmentalization, departments of a factory are divided into two categories i.e., production departments and service departments. Departmentalization of overheads is done in two stages. (a) Allocation of Overheads (b) Apportionment of Overhead …

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Apportionment of overhead expenses

Definition and meanings of apportionment of Overheads There are certain overhead expenses which cannot be charged totally to a specific department or shop, Such expenses are apportioned in a suitable ratio over related departments or shops. Apportionment means distributing of overhead items to cost centers on a fair and reasonable basis. Thus the principle is …

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