Factory Overhead Application Methods
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:
- Materials cost
- Direct labor cost
- Direct labor hours
- Machine hours
- Units of production
- 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:
- Fixed overhead = $15,000
- Variable overhead = $45,000
- 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:
- Applied factory overhead (i.e., overapplied or underapplied)
- 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 $9,000 and actual volume was 5,000 hours.
Required: Calculate the following:
- Variable overhead in burden rate
- Budgeted fixed overhead
- Normal volume
- Applied overhead
- Over- or under-absorbed overhead
- Idle capacity variance
- Spending variance
Solution
Activity Level | Budgeted FOH |
(hrs.) | ($) |
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 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.
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 |
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