## Factory Overhead Practical Problems and Solutions

Factory Overhead Application Methods Problem No. 1 The IQIZ Company estimated its factory overhead of 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 about 25,000 hours. Required: … Read more

## Important Techniques of Factory Overhead Costing

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 … Read more

What is predetermined overhead rate? – Definition: A predetermined overhead rate is an allocation rate that is given for indirect manufacturing costs that are involved in the production of a product or various products. It is used to estimate the manufacturing costs that will take place. The estimation takes place at the beginning of an … Read more

## Computation of Machine Hour Rate

What is Machine Hour Rate? Machine hour rate represents the hourly cost of factory overhead for operating a particular machine and is obtained by dividing the factory expenses connected with a machine for a given period by the number of hours worked by the machine during that period. The Institute of Cost and Management Accountants, … Read more

## Blanket Absorption Rate and Departmental Absorption Rate

Blanket Absorption Rate These terms are used in relation to the recovery or absorption of overhead. In ease, a common absorption rate for overhead is used throughout a factory and for all jobs and units of production irrespective of the department in which they were produced, it is termed as ‘blanket absorption rate‘. A common … Read more

## Methods of Factory Overhead Absorption

The common methods applied for absorbing factory overhead are as follows: (1) Units of Output Method: Under this method, absorption of factory overhead is made on the basis of the number of units manufactured. The overhead rate is obtained by dividing the amount of overhead expenses by the number of units of output. Thus: Formula … Read more

Overhead rates setup for the absorption of overhead may be divided into two parts: (1). Actual Overhead Rate, (2). Pre-determined Overhead Rate. Actual Overhead Rate Actual overhead rate is that which is based on the actual amount of overhead to be absorbed and the actual quantum or value of the base selected such as direct … Read more

## Under-absorption and Over-absorption of Overhead

What is Under-absorption and Over-absorption of Overhead? Where the absorption of overhead is made by a rate based on actual data, the overhead absorbed must be equal to the actual overhead incurred. But where a pre-determined rate is employed, there is generally a difference between the overhead absorbed and the overhead incurred. If the absorbed … Read more