Important Techniques of Factory Overhead Costing

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 30, 2021

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 period / Estimated D.L. Hours) = Per D.L. hour

(4). Machine Hours Basis

(Estimated FOH for the period / Estimated machine hours) = Per machine hours

(5). Prime Cost Basis

= (Estimated FOH for the period / Estimated Prime Cost) x 100

(6). Conversion Cost Basis

= (Estimated FOH for the period / Estimated Conversion Cost) x 100

(7). Units of Production Basis

= (Estimated FOH for the period / Estimated No. of Units) x 100

Factory Overhead Variance Formulas

(1). FOH Applied Rate/Burden Rate

= Estimated FOH for Normal Volume / Normal Volume

(2). Applied FOH for capacity attained/Actual capacity

= Capacity attained x FOH Applied rate

(3). Variable Cost Rate/V.C.R.

= Estimated variable cost for normal volume / Normal volume

(4). Variable Cost for Capacity Attained

= Capacity attained x Variable cost rate

(5). Spending variance/Budget/Expense variance

= Actual FOH – Budgeted Allowance

(6). Capacity Variance/Volume Variance/Idle Capacity Variance

= Applied FOH for capacity attained – Budgeted allowance

(7). Budgeted Allowance

= Fixed cost + Variable Cost for capacity attained

(8). Capacity Attained/Actual Capacity/Actual Output

= Applied FOH for Capacity Attained / FOH Applied Rate

(9). Normal Volume/Standard Activity Level

= Fixed Cost / Fixed Cost Rate

(10). Over Applied/Under Applied FOH

= Actual FOH – Applied FOH for actual output

(11). Variable Cost Rate (For Low & High Point Method)

= Difference in Budgeted FOH / Difference in activity level

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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