Factory Overhead: Planned, Actual, and Applied Chapter 09 Factory Overhead: Planned, Actual, and Applied

The Nature of Factory Overhead Factory Overhead is generally defined as indirect material, indirect labor and other factory expenses which cannot be directly identified with specific jobs, products, or services.

Use of a Predetermined Overhead Rate Because of the impossibility of tracing overhead to specific jobs or specific products, overhead cost is apportioned among jobs and units. A predetermined overhead rate permits a consistent and logical allocation to each unit of output.

Basis used in predtermined overhead Rates Physical Output Direct Material Cost Direct Labor Cost Direct Labor Hours Machine Hours

Physical Output Physical output or units of production is the simplest base for applying factory overhead Example: If Estimated Factory overhead is $300,000 and the company intends to produce 250,000 units during the next period, then the FOH per unit is charged $1.2 ( $ 300.000 : 250.000 units). Then an order with 1,000 completed units, is charged 1,000 x $1.2 = $1,200 of Factory Overhead Estimated Factory Overhead = Factory Overhead per unit Estimated units of production

Direct Materials Cost Base In some companies, a study of past costs reveals a high correlation between direct materials cost and overhead Example: If Estimated Factory overhead totals $300,000 and est. materials cost $250.000, then the FOH rate is $300,000 : $250,000 = 1.2 or 120 % of its direct materials cost. So, if the materials cost for an order is $5,000, Factory Overhead charged to the order would be $5.000 x 1.2 = $6,000 Estimated Factory Overhead x 100 = Factory Overhead as a percentage Estimated material cost of direct materials cost

Direct Labor Cost Base This method’s use is logical when a strong relationship between direct labor cost and factory overhead exists and hourly rates of pay are similar for similar work. Example: If Estimated Factory overhead is $300,000 and total direct labor cost is estimated at $500,000, then FOH rate is $300,000 : $500,000 = 0.6 or 60 %. So, a job or product with a direct labor cost $12,000 is charged $12.000 x 60% = $7,200 for Factory Overhead. Estimated Factory Overhead x 100 = Factory Overhead as a percentage Estimated direct labor cost of direct labor cost

Direct Labor Hour Base The use of the direct labor hour base is justified if there is a strong relationship between direct labor hours and factory overhead Example: If estimated Factory overhead totals $300,000 and direct labor hours are est. 60,000, then factory overhead rate is ($300.000 : 60,000) = $5 per direct labor hour A job with 800 DLH, is charged 800 x $5 = $4,000 for factory overhead Estimated Factory Overhead = Factory Overhead per direct labor hour Estimated direct labor hours

Machine Hour Base When machines are used extensively, machine hours may be the most appropriate basis for applying overhead. Example: If estimated factory overhead totals $300,000 and a total of 20,000 machine hours are estimated, the FOH rate is $300,000 : 20,000 machine hours (MH) = $15 per MH So, a job or product that requires 120 machine hours is charged 120 x $15 = $1,800 for Factory Overhead Estimated Factory Overhead = Factory Overhead per machine hour Estimated machine hours

Applied Factory Overhead It is the amount of overhead included in the cost of an item or job. = Actual Activity X Predetermined FOH Rate = 20000 hours X $15 = 300,000

Actual Factory Overhead Some actual factory overhead costs are recorded when incurred, as transactions are journalized and posted to general and subsidiary ledgers. A basic objectives of accumulating factory overhead is to provide information for control (compare the budgeted amount with the actual incurred). Source documents used for recording overhead are: Purchase vouchers - general journal voucher Materials requisitions - labor time tickets

Applied Factory Overhead and the Over- or Under applied Amount At the end of the month or year, applied factory overhead and actual factory overhead are compared. Actual factory overhead: $140,000 The amount of indirect cost incurred. Less: Applied factory overhead: (130,000) The amount of cost allocated to output. Under applied 10000

Over- or Underapplied Factory Overhead Disposition  Cost of Goods Sold 10,000 Factory overhead 10,000 Overapplied:  Factory overhead 10,000 Cost of Goods Sold 10,000

Disposition of Over- or Underapplied Amount DeWitt Products Income Statement For Year Ending December 31, 20- Sales $1,600,000 Less: COGS 1,193,000 Underapplied FOH 8,500 COGS Adjusted 1,202,000 Gross Profit 398.000

Exercise No.01 On November 30, the work in process account of the Bee Dee Company showed: Materials charged to the work still in process amounted $4560. Factory overhead is a fixed percentage of direct labour cost. Required: The individual amounts of factory overhead and direct labour cost charged to closing balance of work in process. WORK IN PROCESS ACCOUNT Materials 20800 Labour 20160 Foh 15840 Finish goods 45600

Exercise No.02 The Millan Company employes 150 people who work 8 hours per day and 5 days a week. Normal capacity for the month is based on assumption that the equivalent of 47 weeks of work can be expected from an employee. Required: 1. The number of direct labour hours to be used in setting up factory overhead rate based on normal capacity. 2. The number of direct labour hours if management and workers agree to work for 10 hours, 4 day a week.

Exercise No.03 Required:The predetermined factoryoverhead rate based: The Carrcroft Company estimates its factory overhead for next period at $54,000. it is estimated that 36,000 units will be produced at a material cost of $45,000. production will require 24,000 direct labour hours at an estimated cost of $120,000. The machine will require about 1600 hours. Required:The predetermined factoryoverhead rate based: 1. Material cost 2. Units of production 3. Machine Hours 4. Direct Labour Cost 5. Direct Labour Hours

Exercise No.04 Normal capacity of the Duro Company is set at 90,000 hours. At this level of capacity the fixed overhead is $36,000 and variable overhead is $67,500. Actual results show 75,000 hours worked during the period. Required: 1. Predetermined overhead rate based on normal capacity. 2. The amount of factory overhead applied to production.

Exercise No.05 Required: 1. Predetermine overhead rate. Speed Co. assembles and sells electric mixers. All parts purchasedand labour is paid on the basis of $32 per mixer assembled. The cost of parts per mixer totals $40. As the company handles only this one product, the unit cost basis for applying factory overhead is used. Estimated factory overhead for the coming period based on production of 30,000 mixer is as follows: Indirect materials $220,000 Indirect Labour $240,000 Light and heat 30,000 Depreciation 25,000 Miscellaneous 55,000 During the period 29,000 mixers were assembled and actual factory overhead was $565,300. Required: 1. Predetermine overhead rate. 2. The amount of factory over applied to production. 3. The amount of over or under applied factory overhead.

Exercise No.06 Normal capacity of a Company ‘s power plant is estimated to be 4750,000 kilowatt hours per month. At this level of activity, fixed overhead is estimated to be $171,000 and variable overhead is $209,000. During November the power plant produced 5000,000 kilowatt hours and actual overhead for the month totaled $393,000. Required: 1. Predetermined overhead rate based on normal capacity. The amount of factory overhead applied to production. Over or under applied factory overhead.

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