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:

  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:

  • 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:

  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
Over- or Underapplied FOH

2. Variances

Spending variance
Spending Variance
Capacity variance
Capacity variance Calculations
Variance check
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
  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 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

Low & High Point Method 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

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