Lecture-16 Main Ahmad Farhan (ACA) Factory Overhead Lecture-16 Main Ahmad Farhan (ACA)

Exercise Machining Finishing Maintenance Air-conditioning 100,000 70,000 40,000 30,000 Allocated indirect cost 240,000 Machining Finishing Air-conditioning Maintenance Appropriation 60% 15% 25% Air Conditioning 70% 5%

Solution Maintenance Dept (40,000)+5% of Air condition Aircondining Cost(30,000)+25% of maintenance X =40,000+5% of y X = 30,000 + 25% of x X =40,000+0.05(30,000+0.25x) X =40,000+1500+0.0125x X-0.0125x = 41,500 0.9875x = 41,500 X = 41,500 0.9875 Cost of Maintenance Dept x = 42,025

Solution y = 30,000 + 25% of x y = 30,000 + 0.25 (42,025)

Algebraic Method Machinery Finishing Maintenance Air-condition 1,00,000 70,000 40,000 (42,025) 30,000 25,215 6,304 2,025 10,506 (40,506) 28,354 10,127 40,506 1,53,569 86,431 Machining Finishing Air-conditioning Maintenance Appropriation 60% 15% 25% Air Conditioning 70% 5%

Solution Machining Finishing Maintenance Air-conditioning 100,000 Production Service Machining Finishing Maintenance Air-conditioning 100,000 70,000 40,000 30,000 Allocate Indirect cost (240,000) Maintenance 24,000 6,000 (40,000) 10,000 Air conditioning 28,000 10,000 2,000 (40,000) Maintenance 1,200 300 (2000) 500 Air conditioning 350 125 25 (500) Maintenance 15 3.50 (25) 6.50 Air conditioning 5 1.50 0.50 (6.50) 153,570 86,430

Estimated activity level Applied Rate Estimated FOH Cost Estimated activity level

Basis Of Overhead Absorption Machine hours Direct Labor hours Prime Cost Direct Labor cost Number of unit out put Per Hour Percentage Per unit

F.O.H Variance Reasons of Variance Difference between capacity level over which overhead absorption rate is calculated & capacity level attained. Difference between FOH cost budget or estimated over which overhead absorption rate and FOH actually incurred.

F.O.H Variance Budget Variance/Spending variance Arises due to 2nd reason. Capacity Variance / Volume Variance Arises due to 1st reason.

Formula of Variance Volume Variance Applied F.O.H cost *** Less Estimated F.O.H cost *** *** If + favorable If - unfavorable Budgeted Variance Estimated F.O.H cost *** Less Applied F.O.H cost *** If + favorable If - unfavorable

Example Estimated Cost Fixed FOH cost Rs. 80,000 Variable FOH cost 1,00,000 Activity Level 20,000 Direct Labor hours Actual Cost Fixed FOH cost 80,000 Variable FOH cost 1,20,000 Activity Level 25,000 Direct Labor hours Rates Variable FOH rate = 80,000/20,000 = 4/Direct labor hrs Fixed FOH rate =100,000/20,000 = 5/Direct labor hr Overhead absorption rate 9

Solution Volume Variance Applied FOH cost (capacity attained x Overhead absorption rate) 25,000 x 9 2,25,000 Estimated FOH cost {Fixed FOH cost+(capacity attainedxvariable rate)} 80,000 + (25,000 x5) 2,05,000 Favorable 20,000

Solution OR Budgeted Variance Estimated FOH cost 2,05,000 Less Actual FOH Cost 2,00,000 Favorable 5,000 Total Variance Applied FOH 2,25,000 Less Actual FOH 2,00,000 Total Variance 25,000 Volume Variance (Fav) 20,000 Add Budgeted Variance (Fav) 5,000 25,000 OR

Alternative method Volume variance Estimated FOH cost (25,000 x 4) 1,00,000 Actual fixed 80,000 20,000 Budgeted variance Estimated FOH (5,000x5) 1,25,000 Less Actual FOH 1,20,000 5,000