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Factory Overhead Rate Estimated Factory Overhead Estimated Base

The document discusses factory overhead (also known as indirect manufacturing costs, manufacturing overhead, or factory burden) which refers to manufacturing costs that cannot be directly traced to specific jobs or products. Some examples include indirect materials, indirect labor, depreciation, and maintenance. Factory overhead is allocated to products using a predetermined overhead rate based on an estimated overhead amount and activity base like direct labor hours. The application of overhead is compared to actual overhead incurred to calculate a factory overhead variance. Variances can indicate over or underapplied overhead. Flexible and fixed budgets are used for overhead analysis.

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Cassandra Dianne Ferolino Macado
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56 views

Factory Overhead Rate Estimated Factory Overhead Estimated Base

The document discusses factory overhead (also known as indirect manufacturing costs, manufacturing overhead, or factory burden) which refers to manufacturing costs that cannot be directly traced to specific jobs or products. Some examples include indirect materials, indirect labor, depreciation, and maintenance. Factory overhead is allocated to products using a predetermined overhead rate based on an estimated overhead amount and activity base like direct labor hours. The application of overhead is compared to actual overhead incurred to calculate a factory overhead variance. Variances can indicate over or underapplied overhead. Flexible and fixed budgets are used for overhead analysis.

Uploaded by

Cassandra Dianne Ferolino Macado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FACTORY OVERHEAD Maria Cristina P.

Obeso, CPA, MBA

FACTORY OVERHEAD ( other term is indirect manufacturing cost, manufacturing overhead, factory

burden,factory expense)

- Refers to manufacturing costs not classified as direct materials or as direct labor

- Sum total of the indirect manufacturing costs or costs that cannot be conveniently identified
with nor directly charged to specific jobs or products or final cost objectives

Examples:
indirect materials, indirect labor, factory repairsand maintenance, supervision, depreciation
of factory property and equipment , fringe benefits of factory workers

Characteristics of Factory Overhead

1. Factory overhead is multi-sources and is an invisible part of the cost of the finished product
2. Factory overhead cannot be directly traced to a job or product based on stores requisitions (as
in direct materials) and time tickets (as in direct labor)
3. Factory overhead consists of different items that differ in behavior in relation to changes in
volume of production

Objectives in Accounting for Factory Overhead

- Actual factory overhead (factory overhead incurred) is compared with predetermined


figures as shown in budgets or estimates and the difference (or variance) is analyzed to
determine the probable cause or causes thereof.

CHARGING FACTORY OVERHEAD TO PRODUCTION

Use of Predetermined Factory Overhead Rate

- Charging factory overhead to production at a predetermined rate paves the way to its
equitable and logical allocation

Factory overhead rate = Estimated factory overhead


Estimated base

Bases Used in Charging Factory Overhead to Production:

a. Physical output or units of production


b. Direct labor hours
c. Machine hours
d. Direct materials cost
e. Direct labor cost
Example:
Base to be used is Direct Labor Hours

Estimated Factory Overhead = P50,000


Estimated Base = 100,000 Direct labor hours

Factory Overhead rate = 50,000 /100,000 direct labor hours = P0.50 / direct labor hour

COMPUTATION OF FACTORY OVERHEAD APPLIED (estimated FOH applied to production)

Factory Overhead Applied = Factory Overhead rate x Actual Base

Example:

Base to be used is Direct Labor Hours

Estimated Factory Overhead = P50,000


Estimated Base = 100,000 Direct labor hours
FOH Rate = P0.50/direct labor hour
Actual Base = 200,000 direct labor hours

Factory Overhead Applied = 0.50/ direct labor hours x 200,000 direct labor hours
= 100,000

FACTORY OVERHEAD VARIANCE

- The difference between the total amount of factory overhead charged to production
(factory overhead applied) and what has been incurred (actual factory overhead )

OVERAPPLIED FACTORY OVERHEAD

Factory Overhead Applied > Actual Factory overhead FOH Variance –overapplied

150,000 100,000 50,000 FOH variance – overapplied

UNDERAPPLIED FACTORY OVERHEAD

Actual Factory Overhead > Factory overhead applied FOH Variance –underapplied

150,000 100,000 50,000 FOH variance – underapplied

FIXED AND FLEXIBLE BUDGETS

The Factory overhead budget is fixed when budget allowances for other levels of operations cannot
be estimated because of lack of information as to behavior patterns of FOH
The Factory overhead budget is flexible when budget allowances for other levels of operations can be
reasonably estimated because of sufficiency of information

ANALYSIS OF FACTORY OVERHEAD VARIANCE

Factory overhead variances are analyzed to determine their possible causes, to call the attention of the
parties responsible therefor and consequently, to minimize the variances in future operations

SPENDING VARIANCE (expense or budget variance )


- This is due to to incurring an amount that differs from what has been budgeted or allowed
per budget

FIXED BUDGET ANALYSIS FLEXIBLE BUDGET ANALYSIS

Spending Variance : Spending Variance :

Actual FOH Actual FOH


Less: Budgeted FOH Less: Budget allowance on actual capacity
Spending Variance Unfavorable (Favorable) Spending Variance Unfavorable (Favorable

IDLE CAPACITY VARIANCE (capacity or volume variance )

- This is due to operating at a level different from what is normal or budgeted

FIXED BUDGET ANALYSIS FLEXIBLE BUDGET ANALYSIS

Idle Capacity Variance : Idle Capacity Variance :

Budgeted Factory Overhead Budget allowance on actual capacity


Less: Applied Factory Overhead Less: Applied Factory Overhead
Idle Capacity Variance Unfavorable Idle Capacity Variance Unfavorable
(Favorable) (Favorable)

CONTROLLING ACCOUNTS AND SUBSIDIARY RECORDS

The general ledger account Factory Overhead Control is used for all factory overhead items
incurred.
They are recorded in journals and the details are kept in Factory overhead subsidiary ledger of
Factory Overhead Analysis Sheet

DISPOSITION OF FACTORY OVERHEAD VARIANCES

Factory Overhead Variance, when insignificant in amount, is treated as a period cost and is
shown as an adjustment to cost of goods sold.

Factory overhead variance, when significant in amount, is treated as an adjustment tocost of


goods sold, work in process inventory and finished goods inventory

ACCOUNTING FOR FACTORY OVERHEAD

1) To charge overhead to production

Work in process 20,800


Factory Overhead Applied 20,800

2) To take up Factory overhead incurred

Factory overhead control 21,000


Cash and other credits 21,000

3) To set up the variance or close factory overhead applied and factory overhead control *

Factory Overhead Applied 20,800


Factory Overhead Variance 200
Factory Overhead Control 21,000

4) To close the variance to cost of goods sold **

Cost of Goods Sold 200


Factory Overhead Variance 200

Note: * If the Factory Overhead applied is greater than Factory Overhead Control, the entry for
number 3 is:

Factory Overhead Applied xx


Factory Overhead Variance xx
Factory Overhead Control xx

** the entry for number 4 will be

Factory Overhead Variance xx


Cost of Goods Sold XX
CAPACITY PRODUCTION

In the estimation of manufacturing overhead, as well as the estimation of the base to be used
for allocation, it is important to determine what capacity of production should be adopted.

A. THEORETICAL, MAXIMUM OR IDEAL CAPACITY


- A capacity to produce at full speed without interruptions. It gives no allowance for human
capacity to achieve the maximum nor due allowance for any circumstances that might result
to stoppage of production within or not within the control of management

B. PRACTICAL CAPACITY
- A capacity of production that provides allowance for circumstances that might result to
stoppage of production

C. EXPECTED ACTUAL CAPACITY


- A capacity concept based on a short range outlook which is feasible only for firms whose
products are seasonal or when the market and style changes allow price adjustments
according to competitive conditions and customer demands

D. NORMAL CAPACITY
A capacity of production taking into consideration the utilization of the plant facilities to
meet commercial demands served over a period long enough to level out the peaks and
valleys which come with seasonal and cyclical variations.

This capacity is commonly used in the computations of overhead rates.

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