Accounting for

Factory Overhead
Report by Sophia Alaiza Dador
GROUP 6
 Topics covered:

01 02 Classification of
Factory
Overhead

Factory
Overhead
03 Departmentalization
 01
Factory Overhead
 FACTORY OVERHEAD
Factory overhead, also called "manufacturing
overhead" or "factory burden," comprises the indirect
expenses associated with the operations of a
manufacturing plant; these costs cannot be directly
charged to a specific product or project. All expenses
that fall under factory overhead are divided into three
different subcategories: indirect material, indirect labor
and other indirect costs.
 02
Classification of Factory Overhead

.
 A. On the basis of NATURE or ELEMENTS

Indirect
Labor
Refers to the cost of labor which
Indirect
Indirect Material is not engaged directly for
production of goods and services.
Expenses
Refers to that category of Are cost other than indirect
materials which do not form a Example: salary of supervisor, materials and indirect labor
part of the finished product or electrician, watchman. which cannot be directly
cannot be identified to the identified with a job or product.
product conveniently.
Example: rent, repairs, taxes,
Example: lubricating oil, threads, depreciation, insurance
fuel, stationery
 B. According to NORMALITY
Normal overheads - are overheads which are expected

1 to be incurred in attaining a given level of output in

the normal course of business, and are thus,
included in the cost of production.

Abnormal overheads - are generally not expected to be

2 incurred in attaining a given level of output in the normal

course of business, and are thus, charged to costing
profit and loss account
 C. ON THE BASIS OF CONTROLLABILITY

Uncontrollable overheads - are

Controllable overheads - are those indirect expenses which are
those which can be controlled beyond the control of the
by executive action at the management. Examples; factory
point of their occurrence. rent, office salaries, depreciation
and legal expenses.

.
.
 D. ACCORDING TO VARIABILITY
Fixed overheads, also called period costs
or capacity costs, remain fixed or
01 02 Variable overheads - vary
proportionately i.e. In the same
constant in total despite changes in ratio with the production and
the volumes of production or sale. sales volume. They increase in
These costs are not affected during total with the increase in

03
a given period by a change in volume and vice versa. For
output provided such change in example, sales commission
output is not substantial in nature.
For example: rent, interest.

Semi-variable overheads – are neither completely fixed nor entirely

variable. They vary disproportionately with the change in the
volume of output. For example, depreciation will increase due
to wear and tear of machine if output is doubled, but the
increase in depreciation will not be proportionate to the
increase in the output.
E. ON THE BASIS OF FUNCTION
Factory Overheads
also known as production or works or
manufacturing overheads, are indirect
expenses incurred in converting raw material
into finished goods. For example, power,
factory rent, factory insurance

Administration Overheads Selling & Distribution Overheads

Selling Overheads are incurred for creating
are incurred in connection with the general demand, attracting potential customers and
administration of the company. For example, retaining old customers. For example, free
office salaries, office rent, printing and stationery, gift, advertisement
telephone expenses Distribution Overheads are incurred in
maintaining stocks and delivering the goods
to customers. For example, carriage and
freight out, warehouse expenses
 03
Departmentalization
 Departmentalization
Departmentalization is the process of
breaking down an enterprise into
various departments. How jobs are
grouped together is called
departmentalization.
 Departmentalization
. A Department is an organization unit that
is headed by a manager who is responsible
for its activities. Departmentalization and
Division of labor are same things. However
technically both are different. Both
emphasize on the use of the specialized
knowledge, but departmentalization has
higher management level strategic
considerations while the division of labor
has a lower level operating considerations.
 Classification of Departments

● Producing Departments – those

departments that are directly
engaged in the manufacturing
activities.

● Service Departments – those

departments that assist
indirectly by rendering services
Examples:
Producing
Cutting Finishing
Planning Machining
Assembly Cooking
Upholstery Brewing
Mixing Distilling
Refining Mill Room
Bottling Plating
Canning Knitting
Glazing Fabricating
Examples:
Service
Utilities Shipping
Receiving Medical
Inspection Production
Storage Control
Security Personnel
Purchasing Maintenance
Materials Cafeteria
Handling General Factory
Cost Pool
 Procedures of
Departmentalization
The following are procedures in
departmentalizing manufacturing overhead:

1. Calculate departmental predetermined

overhead application rates.
2. Apply the predetermined overhead rates to
production on department basis.
3. Record actual manufacturing overhead costs
by department in the Departmental Overhead
Cost Sheet.
Calculation of Departmental
Overhead Application Rate
Steps:
1. Prepare a budget of total direct
manufacturing overhead costs of
producing departments and total direct
expenses of service departments
expected at the selected activity levels.
Direct departmental overhead costs are
those that can be easily trace to specific
departments. Example: Repairs and
maintenance – traced to maintenance
department.
 Calculation of Departmental
Overhead Application Rate
2. Conduct a factory survey to determine the
bases to be used in the allocating indirect
manufacturing overhead cost and service
department costs. Indirect departmental
costs are costs that do not originate with any
specific department. They are incurred for the
benefit of all departments, so their cost are
allocated among all departments. Examples
are power, light, rent and depreciation.
 Calculation of Departmental
Overhead Application Rate

3. Set up an application rates

worksheet to facilitate cost distribution
by departments
 Calculation of Departmental
Overhead Application Rate

4. Enter budgeted cost that can be

traced directly to specific department
as direct departmental costs.
 Calculation of Departmental
Overhead Application Rate

5. Allocate budgeted manufacturing

cost that cannot be traced to specific
department according to the base
selected.
 Calculation of Departmental
Overhead Application Rate

6. Distribute or reallocate budgeted

service department’s costs to producing
departments
 Calculation of Departmental
Overhead Application Rate

7. Compute departmental
predetermined rates by dividing the
total budgeted overhead costs charged
to each producing department by the
base selected.
That’s all,thank you
☺
Report by Sophia Alaiza Dador
GROUP 6
Use of Predetermined
Overhead Rates and
Producing and Service
Departments
Presented by: Aira Jane A. Guadez
BSA 2C
 1
THE USE OF
.
PREDETERMINED
OVERHEAD RATES
 PREDETERMINED
OVERHEAD RATES
• It refers to the allocation rate that is
assigned to products or job orders at the
beginning of a project based on the
estimated cost of manufacturing
overhead for a specific period of
reporting
 PREDETERMINED
OVERHEAD RATES
• It sets the manufacturing overhead cost
of a work in process.

• It is determined before the production

even begins.
Importance of Predetermined Overhead Rates
One of the first task that management will take on.
It provides a formula that estimates the production cost of a
product in advance.
Using a predetermined overhead rate is advantageous to company
planners because it helps them form strategies for the future.
We will not wait until the after the production has actually
happened.
HOW TO CALCULATE
THE PREDETERMINED
OVERHEAD RATE?

Estimated Manufacturing Overhead

Cost
Estimated Base for the Period
 ESTIMATED
MANUFACTURING
OVERHEAD COSTS

• These are the overhead costs such as the

electricity, administrative salaries and
wages, rent and other costs applied to
the business as a whole.
 Factors to Consider in Calculating the
Predetermined Overhead Rate
Bases to be used Selection of Activity Level
Activity bases which refers to costs This includes the theoretical capacity,
associated with the actual project and are practical capacity, expected actual
directly engaged in the project. capacity, normal capacity, idle capacity
✓ Physical Output/ Unit of Production and excess capacity.
✓ Direct Material Costs - Machine Hour

✓ Direct Labor Cost - Transaction Base

✓ Direct Labor Hour

Bases to be used
✓ Physical Output/ Unit of
Production
✓ Direct Material Costs
✓ Direct Labor Cost
✓ Direct Labor Hour
✓ Machine Hour
✓ Transaction Base
Assume the following budgeted data for the year.

Items

Manufacturing Overhead Php 96,000

No. of Units of Production 24,000 units

Direct Material Cost Php 480,000

Machine Hours 12,000

Direct Labor Hours 40,000

Direct Labor Cost Php 200,000

 Physical Output/ Unit of Production
• Which are the simplest base for applying factory overhead.
• It is satisfactory when a company produces or manufactures only one product,
otherwise, this method is generally unsatisfactory.

Estimated Manufacturing Overhead Costs = Overhead Cost per unit of

Estimated Units of Production production
 Physical Output/ Unit of Production
Items
___Php 96,000_MOH Costs_____
Manufacturing Overhead Php 96,000
24,000 units of production
No. of Units of Production 24,000 units

Direct Material Cost Php 480,000 = Php 4.00 of overhead per unit

Machine Hours 12,000

▪ If we have a job of 1200 units produced our
Direct Labor Hours 40,000
overhead applied would be Php 4,800
Direct Labor Cost Php 200,000 (1200*Php4)
 Direct Materials Cost Basis
• This is plausible when much of the production work consists of receiving, inspecting,
storing, retrieving and handling lots of costly materials.
• The use of direct materials cost base, each product manufactured must require
approximately the same amount of materials or materials usage must be distributed
uniformly throughout the manufacturing process.

Estimated Manufacturing Overhead Costs x 100 = Percentage of Direct Material Costs

Estimated Direct Material Costs
 Direct Materials Cost Basis
Items
___Php 96,000_MOH Costs__ x 100
Manufacturing Overhead Php 96,000
Php 480,000
No. of Units of Production 24,000 units

Direct Material Cost Php 480,000 = 20% of materials costs

Machine Hours 12,000

▪ If we have 22,000 direct material cost on a
Direct Labor Hours 40,000
job, produced our overhead applied would be
Direct Labor Cost Php 200,000 Php 4,000 (122,000*20%)
 Direct Labor Cost Basis
• This method is widely used because it is simple and easy to use. Data concerning
direct labor cost of each job is available from the payroll records and time tickets.

Estimated Manufacturing Overhead Costs x 100 = Percentage of Direct Labor Costs

Estimated Labor Material Costs
 Direct Labor Cost Basis
• It is appropriate to use this base when:
✓ Strong relationship of between direct labor costs and factory overhead exists
✓ Hourly rates of pay are similar for similar work.

• It is inappropriate to use this base when:

✓ Factory Overhead includes depreciation of high cost machinery which bears no
relationship to the direct labor payroll.
✓ Total direct labor costs represents the sum of wages paid to high and low wage
production workers doing similar work.
 Direct Labor Cost Basis
Items
___Php 96,000_MOH Costs__ x 100
Manufacturing Overhead Php 96,000
Php 200,000
No. of Units of Production 24,000 units

Direct Material Cost Php 480,000 = 48% of direct labor costs

Machine Hours 12,000

▪ If we have an actual direct labor cost on a
Direct Labor Hours 40,000
specific job of 6000,then the applied
Direct Labor Cost Php 200,000 overhead would be Php 2880 (6,000*48%)
 Direct Labor Hours Basis
• Which are designated to overcome the second disadvantage of using the direct
labor cost base. The use of direct labor hour base is justified if there is a strong
relationship between direct labor hour and factory overhead. As long as labor
operations are the chief factor in production, this method is acceptable.

Estimated Manufacturing Overhead Costs = Rate per direct labor hour

Estimated Direct Labor Hours
 Direct Labor Hour Basis
Items
___Php 96,000_MOH Costs__
Manufacturing Overhead Php 96,000
40,000 Direct Labor Hours
No. of Units of Production 24,000 units

Direct Material Cost Php 480,000 = Php 2.40 per direct labor hour

Machine Hours 12,000

▪ If we have 500, direct labor hours, then the
Direct Labor Hours 40,000
applied overhead would be Php 1200
Direct Labor Cost Php 200,000 (500*Php 2.40)
 Direct Machine Hours Basis
• When machines are used extensively, machine hours may be the most appropriate
basis for applying the overhead.
• This method is based on time required to perform identical operations by a machine
or group of machines.
The machine hours expected to be used are estimated and a machine hour rate is
determined as follows;
Estimated Manufacturing Overhead Costs = Rate per direct machine hour
Estimated Direct Machine Hours
 Direct Machine Hour Basis
Items
___Php 96,000_MOH Costs__
Manufacturing Overhead Php 96,000
12,000 Direct Machine Hours
No. of Units of Production 24,000 units

Direct Material Cost Php 480,000 = Php 8.00 per direct machine hour

Machine Hours 12,000

▪ Hence, if the job required 400 machine hours,
Direct Labor Hours 40,000
the overhead costs to be applied to that job
Direct Labor Cost Php 200,000 would be Php 3,200 (400*Php 8.00)
 Transaction Base
• It is a group of cost that may be associated with a particular
activity in a manner not adequately represented by any of
the bases previously discussed. (ABC Costing)
SELECTION OF
ACTIVITY LEVEL
✓ Theoretical Capacity
✓ Practical Capacity
✓ Expected Actual Capacity
✓ Normal Capacity
✓ Idle Capacity
✓ Excess Capacity
 Selection of Activity Level
• In calculating the predetermined overhead rate, a great deal depends on the
activity level.
• The GREATER assumed activity level, the LOWER the predetermined overhead
rate.
• The HIGHER the activity level, the SMALLER the fixed portion of the factory
overhead rate.
 Theoretical Capacity
• It is a capacity to produce at full speed without
interruptions. It is achieved if the plant or department
produces at 100% of its rated capacity. It focuses on
opportunities for improvement.
• It is an unattainable goal.
 Practical Capacity
• It is the highest realistic amount of output that a factory can maintain over the
long term.
• It is the maximum theoretical amount of output minus the downtime needed for
ongoing equipment maintenance, machine set-up time, scheduled employee
time off and so forth.
• The amount of practical capacity should be incorporated into an organization’s
budget, so that production is planned at a level so high that it can’t be sustained
for an extended time.
• The reduction from theoretical to practical capacity typically ranges from 15% to
25% which results in a practical capacity level of 75%to 85% of theoretical
capacity.
 Expected Actual Capacity

• It corresponds to the amount of output expected to be

produced during the period. This activity level usually
results in different predetermined rate for each period.
 Normal Capacity

• It corresponds to the average activity over a period long

enough to level out the highs and lows. Its concepts
seeks to stabilize an overhead rate that otherwise would
fluctuate as facilities are used to different degrees in
different periods.
EFFECTS OF CAPACITY
ON FACTORY
OVERHEAD
 Idle Capacity vs. Excess Capacity
Idle Capacity Excess Capacity
• Results from a temporary lack of • In contrast, results either from
sales. When idle capacity is budgeted greater production capacity than a
for the period, its cost is included in company can expect to use or from
the overhead rate only when an imbalance equipment of
expected actual capacity is used as machinery.
the denominator. • This imbalance occurs when the
capacity of one machine does not
match the capacity of other
machines with which it must be
synchronized.
 SAMPLE
PROBLEMS
1. EFG Co. is engaged in business of manufacturing automotive spare parts for two wheelers.
The company has budgeted the following cost for the upcoming year

Cost of Raw Materials Php 120,000,000

Direct Labor Cost 80,000,000
Salaries of Floor Manager 30,000,000
Factory Rent 10,000,000
Depreciation 5,000,000
Property Tax 3,000,000
Direct Labor Hours 150,000 hrs
Further, the company uses direct labor hours to assign manufacturing overhead costs to products.
As per the budget, the company will require 150,000 direct labor hours during the forthcoming year.
Based on the given information, calculate the predetermined overhead rate of EFG Co.

1. Determine the estimated manufacturing overhead costs.

Salaries Php 30,000,000

Factory Rent 10,000,000
Depreciation 5,000,000
Property Tax 3,000,000
Estimated
Php 48,000,000
Manufacturing
Overhead
Further, the company uses direct labor hours to assign manufacturing overhead costs to products.
As per the budget, the company will require 150,000 direct labor hours during the forthcoming year.
Based on the given information, calculate the predetermined overhead rate of EFG Co.

2. Apply the allocation base in calculating the predetermined overhead rate.

Php 48,000,000
= Php 320 overhead per direct labor hour.
150,000 DLH
2. Belift Co. estimates overhead of Php 225,000 for the next year. An estimated 25,000 units will
be produced, with material cost of Php 5,500,000. Conversion will require and estimated 56,250
Direct labor hours at a cost of Php 8.00 per hour and an estimated 75,000 machine hours.

Required: Compute the predetermined overhead rate to be used in applying factory overhead to production
of each of the following bases.

✓ Units of Production
✓ Direct Materials Cost
✓ Direct Labor Hours
✓ Direct Labor Cost
✓ Direct Machine Hours
Units of Production

Estimated MOH Php 225,000__

= = Php 9 overhead is allocated with every unit produced..
Estimated Units 25,000 units
Of production

Direct Materials Cost

Estimated MOH Php 225,000__

X 100 = X 100 = 45% of the direct materials cost.
Estimated Direct Php 500,000
materials cost
Direct Labor Hours

Estimated MOH = Php 225,000__

= Php 4 for every direct labor hour.
Estimated Direct 56,250
Labor Hours

Direct Labor Cost

Estimated Direct Labor Cost = Direct Labor Hours * Cost per hour
Estimated Direct Labor Cost = 56,250* Php 8
Estimated Direct Labor Cost = Php 450,000

Estimated MOH Php 225,000__

X 100 = X 100 = 48.89 % of the direct labor cost.
Estimated Direct Php 450,000
Labor cost
Direct Machine Hours

Estimated MOH Php 225,000__ Php 3 of overheaf per machine hours

= =
Estimated Direct 75000
Machine Hours
3. Theoretical Capacity for SamSan Co. is 80,000 direct labor hours and normal capacity is 50,000 direct
labor hours. The actual capacity attained for fiscal year ended June 30, 20A was 43,000 hours. It is
estimated that 40,000 hours will be worked in 20B. Fixed Factory overhead is Php 400,000 and variable
factory overhead is Php 6.69 per direct labor hour.

Required:
✓ Using the NORMAL CAPACITY, compute for (a) the factory overhead rate and (b) the
fixed part of the factory overhead rate.

✓ Using the EXPECTED ACTUAL CAPACITY, compute for (a) the factory overhead rate
and (b) the fixed part of the factory overhead rate.
REQUIREMENT 1.

(b) The fixed part of the FOH rate.

Fixed Factory overhead / normal capacity level = Fixed Part of FOH rate.
400,000 / 50,000 = Php 8.00

(a) The FOH rate.

Fixed Factory overhead rate + Variable FOH rate per hour = FOH rate

Php 8.00 + Php 6.69 = Php 14.69

REQUIREMENT 2.

(b) The fixed part of the FOH rate.

Fixed Factory overhead / expected actual capacity level = Fixed Part of FOH rate.
400,000 / 40,000 = Php 10

(a) The FOH rate.

Fixed Factory overhead rate + Variable FOH rate per hour = FOH rate

Php 10.00 + Php 6.69 = Php 16.69

 Producing
and Service
Departments
Producing Department Service Department
It manufactures the product by changing the It renders a service that contributes in
form or material or by assembling parts. an indirect way to the manufacture of
Examples: Distilling
the product but does not change the
Cutting Mill Room
form, assembly, or nature of the
Planning Plating
material.
Examples:

Assembly Mixing Utilities Shipping

Upholstery Refining Receiving Medical

Finishing Bottling Inspection Production Control

Machining Canning Storage Personnel

Cooking Glazing Security Maintenance

Brewing Fabricating Purchasing Cafeteria

Materials handling General Factory Cost Pool

 Selection of Producing Department Selection of Service Department
Factors to consider: Can be organized by:

✓ Similarity of operations and machinery in each ✓ Establishing a separate service deparatment

department for each function.
✓ Allocation of operations and machinery ✓ Combining several functions into one
✓ Responsibilities for production and costs department or
✓ Relationship of operations to flow of product ✓ Placing some service costs in a department
✓ Number of Departments called GENERAL FACTORY COST POOL.
Thanks!
 DIRECT AND
INDIRECT
DEPARTMENTA
L COSTS
● PREPARED BY:
● Angela A. Torres
● BSA 2C
OBJECTIVES
• Define direct and indirect
01 departmental costs

Give examples of direct and indirect 02

departmental costs
DIRECT DEPARTMENTAL COSTS
 Traceable To a specific department
 they are divided into the following
categories:

02 01 SUPERVISION, INDIRECT LABOR, AND

OVERTIME
LABOR FRINGE BENEFITS

04 03

REPAIRS AND MAINTENANCE INDIRECT MATERIALS AND SUPPLIES

05

EQUIPMENT DEPRECIATION AND RENT

SUPERVISION, INDIRECT LABOR, AND OVERTIME

• any plant labor not classified as direct

labor is automatically a part of factory
overhead

• premium portion of paid overtime

should be charged as overhead What if there is an incorrect
to the departments which the classification?
overtime occurs
EXAMPLES
 LABOR FRINGE BENEFITS

costs that pertain to direct

laborers and all other production
workers

additional labor costs

 EXAMPLES

Group Sick Vacation

Insurance Pay and Holiday
Pay
 INDIRECT MATERIALS AND SUPPLIES

• Indirect materials- auxiliary to the processing

operations and do not become an essential
part of the end product.

• Supplies- used in the manufacturing process

but do not become a part of the finished goods
EXAMPLES
 REPAIRS AND MAINTENANCE

✗ essential to establish control over repairs and

maintenance and to device effective means of
carrying maintenance cost departments receiving
service

✗ most are traceable to benefiting departments

EXAM
PLE
 EQUIPMENT DEPRECIATION AND RENT

• usually identified with

the department that
uses the assets

• traced to the
department using the
equipment
INDIRECT DEPARTMENTAL COSTS
 incurred for the benefit of all department
 selecting appropriate bases for the
allocations is difficult and arbitrary
 the allocation must be based on the following
(listed in order of preference)
1. resource consumption measure
2. output measure
3. surrogate that is representative of the resources
consumed
INDIRECT DEPARTMENTAL COSTS ALLOCATION BASES

Building Rent Square Footage

Property Tax Square Footage

Depreciation-Buildiing Square Footage

Fire Insurance Square Footage

Building Repairs Square Footage

Electricity (fixed portion) Square Footage

Electricity (variable porrtion) Kilowatt hours

Telephone & Telegraph No. of Employees or No. of telephones

 practice!
1. Cloth and buttons used in manufacturing Direct Materials
clothing
2. Production supervisory wages Factory Overhead (Direct Cost)

3. Utilities Factory Overhead (Indirect Cost)

4. salaries of workers who assembled the Direct Labor

parts into finished chairs
5. Minor repair parts of factory machinery Factory Overhead (Direct Cost)

6. Maintenance, factory and production Factory Overhead (Direct and Indirect Cost)
equipment
7. Storeroom clerks Factory Overhead (Direct Cost)

8. Pension costs Factory Overhead (Direct Cost)

9. Depreciation of factory equipment Factory Overhead (Direct Cost)

10. Indirect materials and supplies Factory Overhead (Direct Cost)

thank you!
Manufacturing overhead -
departmentalization
By: Precious Ann Poquiz
Procedures of departmentalization

1 2 3
Calculate Apply the Record actual
departmental predetermined manufacturing
predetermined overhead rates to overhead costs by
production on department in the
overhead
department basis Departmental
application Overhead Cost
rates. Sheet.

89
 You will be able to :

❑ Calculate and apply

departmental overhead
rates
❑ Allocate service department
costs using direct, step and
algebraic method

90
Manufacturing overhead
all costs incurred in the ▪ Indirect Materials
production process ▪ Indirect labor
which are not ; ▪ Factory insurance
▪ Factory depreciation
✗ Direct Labor ▪ Repairs and
✗ Direct Materials maintenance of factory
✗ Directly traceable assets
▪ Factory rent
▪ Factory utilities

91
Predetermined overhead rate
✓ Immediate costing and pricing
decisions
✓ Allows uniform costing
✓ Within the relevant range, there will
be no problems in fluctuations of
activity level and the cost related
unto.
92
Predetermined overhead rate
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡
Predetermined rate =
𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑒𝑑 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦

NOTE:
o Overhead and activity levels are budgeted by an entity for the whole
accounting period
o The numerator and denominator in determining the POHR is being
studied based on management estimates, past actual production, or
other bases and targets

93
Predetermined overhead rate
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡
Predetermined rate = 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑒𝑑 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦

Bases
▪ Cost of materials
▪ Cost of Direct labor
▪ Direct labor hours
▪ Machine hours
▪ Units of production

94
 All departments in the company will use the same
application rate for manufacturing overhead rate for
manufacturing overhead and the same base. Single
plant-wide rates are applicable when an entity
manufactures only a single product, or different
products are being manufactured by goes through
the same series of productive departments.
-De leon, De leon and Deleon

95
 Departmental rate
When different
products are being
manufactured and
when products do not
pass through the same
series of step of
conversion.
96
 Establishing and using
departmental overhead rates
 Establishing departmental overhead rate
Estimate total departmental Estimate total indirect departmental Calculate
overhead of producing and overhead at the selected activity departmental
service departments at the levels and allocate these cost overhead rates.
expected activity levels among departments.
5
1 3

2 4

Prepare a survey (with measurements of Distribute service department

all allocation bases) for the purpose of
distributing indirect departmental costs to be benefiting
overhead and service department. departments
98
Estimating departmental overhead cost
Kowta Co.
Estimated Departmental Factory overhead
For the year 2021

99
 FACTORY SURVEY
Floor Area Cost of
Producing Number of Kilowatt- Horsepow
% % % (in square % materials %
department Employees* hours er-hours
feet) requestioned
Cutting 8 20 12,800 20 200,00 40 5,250 25 180,000 45
Planning 6.8 17 6,400 10 120,000 24 4,200 20 40,000 10
Assembly 12 30 19,200 30 80,000 16 6,300 30 40,000 10
Upholstery 13.2 33 25,600 40 100,00 20 5,250 25 140,000 35
TOTAL 40 100 64,000 100 500,000 100 21,000 100 400,000 100
* Average based on portion of year employed

100
 Distribution of service department
PRODUCING DEPARTMENT SERVICE DEPARTMENT

Materials General
COST ACCOUNT TOTAL Cutting Planning Assembly Upholstery handling Inspection Utilities Factory
TOTAL DEPARTMENTAL FACTORY
OVERHEAD BEFORE DISTRUBTION 300,00 40,500 36,700 35,000 38,600 28,300 18,600 65,400 36,900

Distribution of service department costs:

Materials handling
(BASE: estimated cost of materials
requisitioned ) 12,735 2,830 2,830 9,905 (28,300)
Inspection
(Base: equally to assembly and holster) 9,300 9,300 (18,600)

Utilities …………….……..20% on KWH 2,616 1,308 3,924 5,232 (13,080)

50% on HPW 13,080 7,848 5,232 6,540 (32,700)

30% on floor area 4,905 3,924 5,886 4,905 (19,620)

General Factory
(Base: number of employees) 7,380 6,273 11,070 12,177 (36,900)
Total Service department
cost distributed 40,716 22,183 38,242 48,059
TOTAL DEPARTMENTAL FOH AFTER
DISTRIBUTION OF SERVICE
DEPARTMENT 300,00 81,216 58,883 73,242 86,659
 Calculate Departmental overhead rate PRODUCING DEPARTMENT

Cutting Planning Assembly Upholstery

TOTAL
DEPARTMENTAL FOH 300,00 81,216 58,883 73,242 86,659
BASES
DIRECT LABOR
HOURS 20,304 24,070
MACHINE HOURS 9,200
DIRECT LABOR
COST 122,000

RATES 4.00 6.40 60% 3.60

Per
Per Direct machine Direct Labor Per direct
Labor hour Cost labor hour
102
 Using departmental overhead rates
Work in process………………………………285,000
Applied FOH- cutting dept
(21,005 actual direct labor hours * 4) 84,020
Applied FOH – Planning dept
(8,500 actual machine hours * 6.40) 54,400
Applied FOH –Assembly department
(111,700 actual direct labor * 60%) 67,020
Applied FOH – Upholstery department
(22,100 actual direct labor hour * 3.60) 79,560

103
 Establishing departmental overhead rate
Estimate total departmental Estimate total indirect departmental Calculate
overhead of producing and overhead at the selected activity departmental
service departments at the levels and allocate these cost overhead rates.
expected activity levels among departments.
5
1 3

2 4

Prepare a survey (with measurements of Distribute service department

all allocation bases) for the purpose of
distributing indirect departmental costs to be benefiting
overhead and service department. departments
104
Methods of allocating service department costs:
Direct Method Step Method Algebraic Method
Direct Allocation Allocates service The use of
of service cost to department cost to mathematical cost
the production all service functions to
department departments as allocate service
well as producing costs.
departments.

105
1 Direct method
Service Department Producing Department
2 step method
Service Department Producing Department
3 Algebraic method
Service Department Producing Department
MJ Manufacturing has four departments. Assembly department and finishing
department make up the production department while cafeteria and maintenance
department make up the service department

The overhead cost of the cafeteria is allocated based on the number of employees
while the overhead cost of the maintenance department is based on the estimated
overhead for the period.

In determining the predetermined overhead rates, the assembly department uses

direct labor hours and finishing department uses machine hours. The following
information is made available:

SERVICE DEPARTMENT PRODUCTION

Cafeteria Maintenance Assembly Finishing
Estimated Factory overhead 250,000 100,000 60,000
Estimated Direct Labor Hours 150,000 200,000 DLH 100,000 DLH
Estimated machine hours 150,000 MH 250,000MH
Number of employees 100 20 1,500 1,000

Allocate service department costs using direct, sequential and algebraic method 109
Direct method
SERVICE DEPARTMENT PRODUCTION
Cafeteria Maintenance Assembly Finishing

Estimated Factory overhead 250,000 100,000 60,000

Estimated Direct Labor Hours 150,000 200,000 DLH 100,000 DLH

Estimated machine hours 150,000 MH 250,000MH

Number of employees 100 20 1,500 1,000

Assembly Finishing
Estimated Factory overhead ₱100,000.00 ₱60,000.00
Cafeteria cost allocation:
P250,000 x 1,500e/2,500e ₱150,000.00
P250,000 x 1,00e/2,500e ₱100,000.00
Maintenance cost allocation:
P150,000 x (P100,000/160,000) ₱93,750.00
P150,000 x (P60,000/160,000) ₱56,250.00
Total estimated factory overhead ₱343,750.00 ₱216,250.00
POHR bases 200,000 DLH 250,000 MH
Overhead application rate ₱1.72 ₱0.87
110
Step method
SERVICE DEPARTMENT PRODUCTION
Cafeteria Maintenance Assembly Finishing

Estimated Factory overhead 250,000 100,000 60,000

Estimated Direct Labor Hours 150,000 200,000 DLH 100,000 DLH

Estimated machine hours 150,000 MH 250,000MH

Number of employees 100 20 1,500 1,000

Maintenance Assembly Finishing

Estimated Factory overhead ₱150,000.00 ₱100,000.00 ₱60,000.00
Cafeteria cost allocation:
P250,000 x 20e/2,520e ₱1,984.13
P250,000 x 1,500e/2,520e ₱148.00
P250,000 x 1,000e/2,520e ₱99,206.35
Overhead after cafeteria costs ₱151,984.13 ₱248,809.52 ₱159,206.35
Maintenance cost allocation:
For distribution -₱151,984.13
P151,984 x (P100,000/160,000) ₱94,990.08
P151,984 x (P60,000/160,000) ₱56,994.05
Total estimated factory overhead ₱343,799.61 ₱216,200.40
Divide by POHR bases 200,000 DLH 250,000 MH
111
Overhead application rate ₱1.72 ₱0.86
 ALGEBRAIC method
SERVICE DEPARTMENT PRODUCTION
Cafeteria Maintenance Assembly Finishing

Estimated Factory overhead 250,000 100,000 60,000

Estimated Direct Labor Hours 150,000 200,000 DLH 100,000 DLH

Estimated machine hours 150,000 MH 250,000MH

Number of employees 100 20 1,500 1,000

Cafeteria percentages based on employees 0.79% 59.52% 39.68%

Maintenance percentages based on
20e/2,520e
overhead costs 60.98% 24.39% 14.63%

250/410
C = 250,000 + 60.98%M
M = 150,000 + 0.79%C

C = 250,000 + 60.98% ( 150,0000 + 0.79%C) M = 150,000 + 0.79% C

C = 250,000 + 91,470 + 0.0048C M = 150,000 + 0.79% (343,116.96)
C - 0.0048C =341,470 M = 150,000 + 2,710.62
0.9952C = 341,470
M = 152,710.62
C = 343,116.96
112
 SERVICE DEPARTMENT PRODUCTION
ALGEBRAIC method Cafeteria Maintenance Assembly Finishing
Estimated Factory overhead 250,000 100,000 60,000
C = 343,116.96 Estimated Direct Labor Hours 150,000 200,000 DLH 100,000 DLH
M = 152,710.62
Estimated machine hours 150,000 MH 250,000MH
Number of employees 100 20 1,500 1,000
Cafeteria percentages based on employees 0.79% 59.52% 39.68%
Maintenance percentages based on
overhead costs 60.98% 24.39% 14.63%
Assembly Finishing
Estimated Factory overhead ₱100,000.00 ₱60,000.00
Cafeteria cost allocation:
P343,116.96 x 59.62% ₱204,223.21
P343,116 x 39.68% ₱136,148.81
Maintenance cost allocation:
P152,710.62 x 24.39% ₱37,246.12
P152,710.62 x 14.63% ₱22,341.56
Total estimated factory overhead 341,469,33 ₱218,490.37
POHR bases 200,000 DLH 250,000 MH
Overhead application rate ₱1.71 ₱0.87

113
 ASSEMBLY FINISHING

Direct Method

Total estimated FO ₱343,750.00 ₱216,250.00

Overhead application rate ₱1.72 ₱0.87

Step Method

Total estimated FO ₱343,799.61 ₱216,200.40

Overhead application rate ₱1.72 ₱0.86

Algebraic Method

Total estimated FO ₱343,469.33 ₱218,490.00

Overhead application rate ₱1.71 ₱0.87

114
Your turn
Nuggets?

115
- PRECIOUS ANN POQUIZ
Problem no. 1
Summit Manufacturing has two producing department, Grinding and smoothing and two service department,
Maintenance and General Factory. Departmental overhead cost for the coming year have been budgeted as follows, before the
distribution of service department cost to producing department; Grinding, P175,000;Smoothing, 230,000; Maintenance,
P76,000: and General factory, P200,000. Maintenance Cost are distributed based on hours of maintenance provided. General
factory costs are based the maximum number of employees during the year.

Factory overhead will be applied to products using predetermined departmental overhead rates. The
predetermined rate in Grinding is based on machine hours, and the predetermined rate in Smoothing is based on Direct labor
hours. The survey for the coming year is summarized as follows.
Grinding Smoothing Maintenance General Factory

Direct Labor Hours used 7,500 30,000 - -

Machine Hours used 4,000 2,000 - -

Hours of maintenance service
used 180 900 200 720
Number of materials
requisitions 200 10 30 10

Average number of employees 5 2 1 2

Maximum number of employees 6 3 1 2

REQUIRED :Calculate Predetermined Departmental overhead rate for the coming year, using Direct, Step
and Simultaneous method
117
 Direct method Grinding Smoothing Maintenance
General
Factory

Direct Labor Hours used 7,500 30,000 - -

Machine Hours used 4,000 2,000 - -

Hours of maintenance service used 180 900 200 720

Number of materials requisitions 200 10 30 10

Average number of employees 5 2 1 2

Maximum number of employees 6 3 1 2

Producing Department Service Department
General
Total Grinding Smoothing Maintenance Factory
Budgeted Overhead 681,000 175,000 230,000 76,000 200,000
Maintenance Cost
Allocation 12,667 63,333 -76,000
General Factory Cost
76,000x180/1080 76,000x900/1080
Allocation 133,333 66,667 -200,000
Total Factory Overhead 681,000 321,000 360,000
30,000
Bases: 4,000 MHrs. LBHrs.
Predetermined Dept. OH
rates ₱80.25 ₱12.00 118
 STEP method Grinding Smoothing Maintenance
General
Factory

Direct Labor Hours used 7,500 30,000 - -

Machine Hours used 4,000 2,000 - -

Distribution Sequence:
First Maintenance then Hours of maintenance service used 180 900 200 720
General Factory Number of materials requisitions 200 10 30 10

Average number of employees 5 2 1 2

Maximum number of employees 6 3 1 2

Producing Department Service Department

General
Total Grinding Smoothing Maintenance Factory
Budgeted Overhead 681,000 175,000 230,000 76,000 200,000

Maintenance Cost Allocation 7,600 38,000 -76,000 30,400

General Factory Cost Allocation 76,000x720/1,800

153,600 76,800 -230,400

Total Factory Overhead 681,000 333,200 344,800
Bases: 4,000MHRs 30,00LBHrs
Predetermined Dept. OH rates P 84.05 P 11.49
119
 algebraic method Grinding Smoothing Maintenance
General
Factory

Direct Labor Hours used 7,500 30,000 - -

Machine Hours used 4,000 2,000 - -

Let : M = 76,000+10% G Hours of maintenance service used 180 900 200 720

G = 200,000 + 40%M Number of materials requisitions 200 10 30 10

Average number of employees 5 2 1 2

Maximum number of employees 6 3 1 2

Maintenance Percentage based on hours of machine service used 10% 50% 40%

General Factory percentages based on maximum number of employees 60% 30% 10%

M = 76,000 + 10%( 200,000 + 40%M) G = 200,000 + 40%(100,000)

M = 76,000 + 20,000 + 0.04M G = 200,000 +40,000
M = 96,000+ 0.04M G = 240,000
0.96 = 96,000
M = 100,000
120
 algebraic method Grinding Smoothing Maintenance
General
Factory

Direct Labor Hours used 7,500 30,000 - -

M = 100,000 Machine Hours used 4,000 2,000 - -
G = 240,000 Hours of maintenance service used 180 900 200 720

Number of materials requisitions 200 10 30 10

Average number of employees 5 2 1 2

Maximum number of employees 6 3 1 2

Maintenance Percentage based on hours of machine service used 10% 50% 40%
General Factory percentages based on maximum number of employees 60% 30% 10%
Producing Department Service Department

General
Total Grinding Smoothing Maintenance Factory
Budgeted Overhead 681,000 175,000 230,000 100,000 240,000
Maintenance cost allocation 10,000 50,000 -100,000
General Factory allocation 144,000 72,000 -240,000
Total Factory Overhead 329,000 352,000
Bases 4,000 30,00
Predetermined Dept. OH rates P 82.25 P 11.73

121
Problem no. 2
The president of Valencia Products Company has been critical of the product costing methods by which factory
overhead is charged to products by a plantwide overhead rate. The chief accountant suggested a departmentalization of the
facility for the purpose of calculating departmental overhead rates. The following estimated direct departmental overhead were
accumulated on an annual basis:
Producing Departments Service Department
Overhead items Department 10 Department 12 Department 14 Storeroom Repairs & Maintenance General Factory
Supervision P 20,500 P 16,000 P 14,000 P 7,200 P 8,000 P24,000
Indirect Labor 5,400 6,000 8,000 6,133 7,200 18,000
Indirect Supplies 4,850 5,600 5,430 1,400 3,651 1,070
Labor fringe benefit 6,872 9,349 10,145 640 760 2,100
Equipment depreciation 6,000 8,000 10,000 560 1,740 1,100
Property tax, depreciation of build, etc. 20,000
TOTAL P43,622 P44,949 P47,575 P15,933 P21,351 P66,270
The annual light and power bill is estimate at P9,300 and is distributed on the basis of electricity usage. The order
and the bases of distribution of service department costs ( using the step method ) are as follows: (a) General Factory cost pool –
area occupied; (b) Storeroom – estimated requisitions; (c) Repairs and Maintenance – estimated repairs and maintenance hours.
The following departmental information is provided:
Producing Departments Service Department
Department 10 Department 12 Department 14 Storeroom Repairs & Maintenance General Factory
Percentage of usage of electricity 20% 25% 30% 3% 12% 10%
Area occupied ( square feet) 21,000 25,200 29,400 3,360 5,040 2,000
Estimated number of requisitions 124,200 81,000 40,500 - 24,300 6,000
Estimated number of repairs and
maintenace hours 4,800 4,200 6,000 3,000 - 1,000
Estimated machine hours 800 900 1,600 - - -
122
Prepare an overhead distribution sheet, with calculation of factory overhead rates for producing department based on machine hours.
 The annual light and power bill is estimate at P9,300 and is distributed on the basis of electricity usage. The order
and the bases of distribution of service department costs ( using the step method ) are as follows: (a) General Factory cost pool –
area occupied; (b) Storeroom – estimated requisitions; (c) Repairs and Maintenance – estimated repairs and maintenance hours.
The following departmental information is provided:
Producing Departments Service Department
Department 10 Department 12 Department 14 Storeroom Repairs & Maintenance General Factory
Percentage of usage of electricity 20% 25% 30% 3% 12% 10%
Area occupied ( square feet) 21,000 25,200 29,400 3,360 5,040 2,000
Estimated number of requisitions 124,200 81,000 40,500 - 24,300 6,000
Estimated number of repairs and
maintenace hours 4,800 4,200 6,000 3,000 - 1,000
Estimated machine hours 800 900 1,600 - - -

Producing Departments Service Department

Repairs &
Department 10 Department 12 Department 14 Storeroom Maintenance General Factory
Direct departmental OH
Supervision P 20,500 P 16,000 P 14,000 P 7,200 P 8,000 P24,000
Indirect Labor 5,400 6,000 8,000 6,133 7,200 18,000
Indirect Supplies 4,850 5,600 5,430 1,400 3,651 1,070
Labor fringe benefit 6,872 9,349 10,145 640 760 2,100
Equipment depreciation 6,000 8,000 10,000 560 1,740 1,100

Property tax, depreciation of build,etc. 20,000

Total P43,622 P44,949 P47,575 P15,933 P21,351 P66,270
Proration of light
and power 1,860 2,325 2,790 279 1,116 930
TOTAL FOH 45,482 47,274 50,365 16,212 22,467 67,200 123
 The annual light and power bill is estimate at P9,300 and is distributed on the basis of electricity usage. The order
and the bases of distribution of service department costs ( using the step method ) are as follows: (a) General Factory cost pool –
area occupied; (b) Storeroom – estimated requisitions; (c) Repairs and Maintenance – estimated repairs and maintenance hours.
The following departmental information is provided:
Producing Departments Service Department
Department 10 Department 12 Department 14 Storeroom Repairs & Maintenance General Factory
Percentage of usage of electricity 20% 25% 30% 3% 12% 10%
Area occupied ( square feet) 21,000 25,200 29,400 3,360 5,040 2,000
Estimated number of requisitions 124,200 81,000 40,500 - 24,300 6,000
Estimated number of repairs and
maintenace hours 4,800 4,200 6,000 3,000 - 1,000
Estimated machine hours 800 900 1,600 - - -

Producing Departments Service Department

Repairs &
Department 10 Department 12 Department 14 Storeroom Maintenance General Factory
TOTAL FOH 45,482 47,274 50,365 16,212 22,467 67,200
Distribution of service
departments:
General Factory overhead cost pool 16,800 20,160 23,520 2,688 4,032 -67,200
Storeroom 8,694 5,670 2,835 -18,900 1,701
Repairs and maintenance 9,024 7,896 11,280 -28,200
Total- producing departments 80,000 81,000 88,000
Machine hours 800 900 1,600
Overhead rate per machine hours P 100.00 P 90.00 P 55.00

124
 Producing Departments Service Department

Repairs & General

Department 10 Department 12 Department 14 Storeroom Maintenance Factory
Direct departmental OH
Supervision P 20,500 P 16,000 P 14,000 P 7,200 P 8,000 P24,000
Indirect Labor 5,400 6,000 8,000 6,133 7,200 18,000
Indirect Supplies 4,850 5,600 5,430 1,400 3,651 1,070
Labor fringe benefit 6,872 9,349 10,145 640 760 2,100
Equipment depreciation 6,000 8,000 10,000 560 1,740 1,100
Property tax, depreciation of
build,etc. 20,000
Total P43,622 P44,949 P47,575 P15,933 P21,351 P66,270
Proration of light
and power 1,860 2,325 2,790 279 1,116 930
TOTAL FOH 45,482 47,274 50,365 16,212 22,467 67,200
Distribution of service
departments:

General Factory overhead cost pool 16,800 20,160 23,520 2,688 4,032 -67,200
Storeroom 8,694 5,670 2,835 -18,900 1,701
Repairs and maintenance 9,024 7,896 11,280 -28,200

Total- producing departments 80,000 81,000 88,000

Machine hours 800 900 1,600

Overhead rate per machine hours P 100.00 P 90.00 P 55.00 125

Thanks!
Any questions?

126
FACTORY OVERHEAD
ACTUAL FACTORY
OVERHEAD
YUSI, MARK LAWRENCE D. BSA 2C
ACTUAL FACTORY OVERHEAD
• The Basic Objective of accumulating
overhead is to provide information for Control.
• Control requires two things.
• 1. Reporting cost to the individual
department heads responsible for them
• 2. Making Comparisons with amounts that
would be budgeted for the level of activity
actually achieved.
ACTUAL FACTORY OVERHEAD
• Principal Source of Documents
• Purchase Vouchers

• Materials Requisition

• Labor time tickets

• General Journal Vouchers

 ACTUAL FACTORY OVERHEAD

• JOURNAL ENTRY
• Debit: Factory Overhead

Control
• Credit: Asset/Liability/Other

account.
FACTORY OVERHEAD
APPLIED FACTORY
OVERHEAD
YUSI, MARK LAWRENCE D. BSA 2C
 132
APPLIED FACTORY OVERHEAD

▫ Amount of Cost Allocated to

Output
 133
APPLIED FACTORY OVERHEAD

▫ Two Major Reasons to justify the use of an

annualized overhead application:
▫ 1. To overcome fluctuations in the computed unit
cost due to changes in the level of volume from
month to month.
▫ 2. To overcome fluctuations in the computed unit cost due
to seasonal calendar, and other factors that may affect the
total level of overhead costs incurred each month.
 134
APPLIED FACTORY OVERHEAD

▫ JOURNAL ENTRY

▫ Debit: Work In Process

▫ Credit: Applied Factory Overhead
 135
APPLIED FACTORY OVERHEAD

▫ FORMULA
Applied Factory Overhead = (Predetermined factory
OH) x (Actual machine hours or Capacity)
 136
APPLIED FACTORY OVERHEAD
▫ Sample Problem 1
The John & Co.’s burden rate is $2.00 per hour.
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
Compute the Applied Overhead
 137
APPLIED FACTORY OVERHEAD
▫ Sample Problem 1
The John & Co.’s burden rate is $2.00 per hour. 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
▫ FORMULA
Applied Factory Overhead = (Predetermined factory OH) x (Actual machine hours or
Capacity)
Applied FOH= ($2) x (Actual machine hours or Capacity)
Applied FOH= ($2) x (5,000 HRS)

Applied FOH= $10,000

FACTORY OVERHEAD
OVER OR UNDERAPPLIED
FACTORY OVERHEAD
YUSI, MARK LAWRENCE D. BSA 2C
 139

At the end of the period,

Applied Factory Overhead
account is subsequently
closed to Factory
Overhead Control
Account. Journal Entry: Dr.
Applied Factory Overhead;
Cr. Factory Overhead
Control
The balance of Factory Overhead Control, if any, 140
should be closed to Overapplied/Underapplied
Factory Overhead. Joural Entry:

Overapplied Overhead - results

when product costs are overstated because the actual
overhead costs were lower than expected (applied
overhead).

Factory Overhead Control xx

Over Applied Factory OH xx
The balance of Factory Overhead Control, if any, should be closed to
Overapplied/Underapplied Factory Overhead. 141
Joural Entry:
Underapplied Overhead - results
when product costs are overstated because
the actual overhead costs were higher than
expected (applied overhead

Underapplied Factory Overhead xx

Factory OverHead control xx
The Over/Underapplied must be closed in: 142

(Immaterial)

UNDERAPPLIED OVERAPPLIED
Dr. Cost of Goods sold XX Dr. Overapplied FOH XX
Cr. Underapplied FOH Cr. Cost of Goods sold XX
XX
The Over/Underapplied must be closed in: 143

(material)

UNDERAPPLIED OVERAPPLIED
Dr. Cost of Goods sold XX Dr. Overapplied FOH XX

Dr. Work in process Inv. xx Cr. Cost of Goods sold XX

Cr. Work in Process inv. XX
Dr. Finished Goods Inv. XX
Cr. Underapplied FOH
XX Cr. Finished Goods Inv. XX

INV- INVENTORY INV- INVENTORY

FACTORY OVERHEAD
ANALYSIS OF
OVER/UNDERAPPLIED FACTORY
OVERHEAD
YUSI, MARK LAWRENCE D. BSA 2C
 145

VOLUME FORMULAS
VARIANCE Fixed Applied Overhead xx
(CAPACITY VARIANCE) Fixed Overhead Budgeted (xx)
Deviation due to the fact that the Favorable(Unfavorable) Vol. Variance XX
number of hours actually worked
Fixed Applied Overhead =(Budgeted fixed rate)
during the period differ from the x (Actual Hrs)
estimated number of hours used
Fixed OH Budgeted =( Standard Fixed OH per
in computing predetermined unit ) x (Normal Capacity or Hrs of production)
overhead rate.
 146

FORMULAS SPENDING
Actual Overhead Inccured
Budgeted Overhead for Hrs Worked
Fixed cost xx
xx
VARIANCE
(Controllable Variance)
variable cost xx xx
(Favorable) Unfavorable Spending Variance XX
The remainder of over/underapplied
overhead represents the amount by
which actual expenditures exceed the
Fixed OH Budgeted =( Standard Fixed OH per amount that should have been spend for
unit ) x (Normal Capacity or Hrs of overhead based on the number of hours
production)
worked
 147
NET VARIANCE

FORMULAS
Volume Variance:
Fixed Overhead Applied (budgeted fxd rate x XX
actual hours
Fixed Overhead Budgeted (XX)
Favorable (Unfavorable) Volume Variance XX
Spending Variance:
Actual overhead Incurred XX
Budgeted OH for hours worked: XX
Fixed
Variable
(Favorable) Unfavorable Spending Variance XX
NET VARIANCE XX
 148
Sample Problem 2 Predetermined Factory Overhead
Factory Overhead for the King Applied Factory Overhead =
Manufactures Company has been (Predetermined factory OH) x (Actual
estimated as follows: machine hours or Capacity)

Fixed Overhead = P15,000

Variable Overhead = P45,000
POHR=Applied Factory Overhead / Actual
Estimated Direct Labour Hours =
Hrs.
20,000
POHR= (P15,000+P45,000) / (Actual Hrs)
Production for the month reached 75% POHR= (P15,000+P45,000) / (20,000 Hrs)
of the budget, and actual factory
=P 3.00 Per Hr.
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances
 149
Sample Problem 2 Applied FOH for Actual Capacity
Applied FOH for Actual Capacity=(Actual Capacity) x
Factory Overhead for the King (Factory Overhead Hrs) x (POHR)
Manufactures Company has been
estimated as follows:
Fixed Overhead = P15,000 =(20,000Hrs x 75%) x
Variable Overhead = P45,000 (POHR)
Estimated Direct Labour Hours =
20,000 =(15,000Hrs) x (P3)
Production for the month reached 75% =P45,000
of the budget, and actual factory
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances
 150
Sample Problem 2 Budgeted Overhead
Factory Overhead for the King
Manufactures Company has been Budgeted Overhead= Fixed cost + Variable
Cost for Actual Capacity
estimated as follows:
Fixed Overhead = P15,000 =P15,000 x (45,000x75%)
Variable Overhead = P45,000
Estimated Direct Labour Hours =
=(P15,000) + (P33,750)
20,000 =P48,750
Production for the month reached 75%
of the budget, and actual factory
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances
 151
Sample Problem 2 OVER OR UNDER
Factory Overhead for the King
APPLIED FOH
Manufactures Company has been
estimated as follows:
Fixed Overhead = P15,000
Variable Overhead = P45,000
Estimated Direct Labour Hours =
20,000
Production for the month reached 75%
of the budget, and actual factory
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances
 152
Sample Problem 2
Factory Overhead for the King VOLUME VARIANCE
Manufactures Company has been
estimated as follows:
Fixed Overhead = P15,000
Variable Overhead = P45,000
Estimated Direct Labour Hours =
20,000
Production for the month reached 75% FAVORABLE
of the budget, and actual factory
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances
 153
Sample Problem 2
Factory Overhead for the King SPENDING VARIANCE
Manufactures Company has been
estimated as follows:
Fixed Overhead = P15,000
Variable Overhead = P45,000
Estimated Direct Labour Hours =
20,000
Production for the month reached 75% FAVORABLE
of the budget, and actual factory
overhead totalled P43,000.
(a). Over or Under Applied Factory Overhead
(b). Spending and Capacity Variances