# Factory Overhead: Practical Problems and Solutions Written by True Tamplin, BSc, CEPF®
Updated on September 3, 2021

### Problem 1

IQIZ estimated its factory overhead for 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 for approximately 25,000 hours.

Required: Calculate the factory overhead rate that may be used in applying FOH to production on each of the following bases:

1. Materials cost
2. Direct labor cost
3. Direct labor hours
4. Machine hours
5. Units of production
6. Prime cost

### Solution

1. Material Cost Basis
Formula:
= (Estimated factory overhead / Estimated material cost) x 100
= (\$160,000 / \$200,000) x 100
= 80%
2. Direct Labor Cost Basis
Formula:
= (Estimated FOH / Estimated DL cost) x 100
= (\$160,000 / \$80,000) x 100
= 200%
3. Direct Labor Hours Basis
Formula:
= (Estimated FOH / Estimated DL hours) x 100
= \$160,000 / 40,000 hrs.)
= \$4.00 per hour
4. Machine Hours Basis
Formula:
= Estimated FOH / Estimated machine hours
= \$160,000 / 25,000 hrs.
= \$6.40 per machine hour
5. Units of Production Cost
Formula:
= Estimated FOH / Estimated no. of units
= \$160,000 / 40,000 hours
= \$4.00 per unit
6. Prime Cost Basis
Formula:
= Estimated FOH / Estimated prime cost
= (\$160,000 / (\$200,000 + 80,000)) x 100
= 89%

## FOH Variances

### Problem 2

The factory overhead for the King Manufacturing Company is estimated as follows:

• Estimated direct labor hours = 20,000

Production for the month reached 75% of the budget. In addition, actual factory overhead totalled \$43,000.

Required: Calculate the following:

1. Applied factory overhead (i.e., overapplied or underapplied)
2. Spending and capacity variances

### 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

### Solution

1. Overapplied or underapplied FOH 2. Variances

Spending variance Capacity variance Variance check ## High-Low Point Method

### Problem 3

The burden rate of John & Co. is \$2.00 per hour. The 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: Calculate the following:

1. Variable overhead in burden rate
3. Normal volume
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

 Budgeted FOH for 7,000 hrs. \$12,000 Less VC for 7,000 hrs. (7,000 x 1) \$7,000 Fixed Cost \$5,000 OR Budgeted FOH for 3,000 hours \$8,000 Less VC 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.

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 Overapplied FOH \$1,000

#### 6. Capacity Variance

 FOH Applied for Capacity Attained \$10,000 Less Budgeted Allowance \$10,000 0

#### 7. Spending Variance

 Actual FOH \$9,000 Less Budgeted Allowance \$10,000 1,000 (Favourable)

Variance check Calculations

 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

### 4 thoughts on “Factory Overhead: Practical Problems and Solutions”

1. Amazingly perfect … thnku for this material it helps me alot as tomorrow is my exam and am really very worried as i dont know anything about accounting but it makes posible for me to atleast attempt exam easily