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

Frequently Asked Questions

What is a factory overhead cost?

Factory overhead costs are the indirect costs of producing goods and services in a factory. These costs include items like rent, insurance, utilities, and wages for supervisors and support staff. Factory overhead costs are usually classified as either fixed or variable.

Why is it important to track factory overhead costs?

Factory overhead costs can have a significant impact on a company's bottom line, so it is important to track these costs carefully. By understanding where these costs are coming from, companies can make informed decisions about how to reduce them.

What is the direct material cost basis?

The direct Material Cost basis is a method of calculating factory overhead costs by dividing estimated factory overhead costs by estimated direct Material Costs. This method is most commonly used when the factory overhead costs are variable in nature.

What is the total manufacturing expense basis?

The total manufacturing expense basis is a method of calculating factory overhead costs by dividing estimated factory overhead costs by total manufacturing expenses. This method is most commonly used when the factory overhead costs are mixed in nature.

What is the conversion cost basis?

The conversion cost basis is a method of calculating factory overhead costs by dividing estimated factory overhead costs by estimated conversion cost. This method is most commonly used when the factory overhead costs are fixed in nature.

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