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

2. 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%

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

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

5. 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%

6. 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, , (40,000) 10,000
Air conditioning
28, , ,000 (40,000)
Maintenance
1, (2000)
Air conditioning
(500)
Maintenance
(25)
Air conditioning
(6.50)
153,570
86,430

7. Estimated activity level
Applied Rate
Estimated FOH Cost
Estimated activity level

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

9. 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.

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

11. 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

12. Example Estimated Cost Fixed FOH cost Rs. 80,000
Variable FOH cost ,00,000
Activity Level ,000 Direct Labor hours
Actual Cost
Fixed FOH cost ,000
Variable FOH cost ,20,000
Activity Level ,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

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

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

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