Ch 9 Factory Overhead - 2a

7/27/2019 Ch 9 Factory Overhead - 2a

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This chapter

Discusses the methods, procedures andbases available for applying factory overhead

Describes methods and procedures for

classifying and accumulating actual factoryoverhead

Shows computations for over or underappliedfactory overhead

Analyzes the total net variance


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Factory Overhead

Factory overhead is generally defined as:

Indirect materials

Indirect labor

All other factory expenses that cannotconveniently be identified with specific jobs orproducts.


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Factory Overhead

Also known as:

Factory burden

Manufacturing expense

Manufacturing overhead

Factory expense

Indirect manufacturing cost


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Factory Overhead possesses twocharacteristics:

Relationship with product

Difficult to trace factory overheads to certainjobs or products.

A predetermined overhead rate permits anequitable and logical allocation , therewithabandoning the use of actual cost for costingpurposes.

Relationship with volume

Fixed and variable expenses (Total & per unit)


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Predetermined Factory Overhead Rate

Job Order Costing

Total overhead cost are estimated

Total estimated overhead cost are related to

direct labor dollars, direct labor hours, etc toexpress it as a rate

Process Costing

Can produce product cost without the use of

overhead ratesApplying predetermined rates are

recommended as they speed up unit productcost calculations


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Factors to be considered in Selection

of Overhead rates

Base to be used

Physical output

Estimated factory overhead = factory overhead/unit Estimated units of production

Direct materials cost

Estimated factory overhead *100 = % of overhead/direct material cost

Estimated material cost


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Factors to be considered in

Selection of Overhead rates Direct labor cost

Estimated factory overhead *100 = % of overhead/direct labor cost

Estimated Direct labor cost

Direct labor costs = Direct labor hours* hourly wage rate

Direct labor hours Estimated factory overhead = Rate per direct labor hour

Estimated Direct labor hours

Machine hours Estimated factory overhead = Rate per machine hour

Estimated machine hours


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of Overhead rates

Activity level selection

Normal capacity long-term approach

An overhead rate in which expenses andproduction are based on average utilization ofthe physical plant over a time period longenough to level out the highs and lows that

occur in every business venture The rate does not change because of changes

in actual production


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of Overhead rates

Expected actual capacity short-termapproach

A rate in which overhead and production are

based on the expected actual output for thenext production period.

The use of predetermined rate based onexpected actual production is often due to thedifficulty of judging current performance on along range or normal capacity.


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Example

Normal capacity= 150,000 DLH

Actual capacity= 116,000 hours

Expected actual capacity= 120,000DLH

Fixed expense= $120,000

Variable expense= $0.50/ DLH


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Solution

Fixed expense 120,000 120,000

Variable expense:

150,000 hrs*0.50 75,000

120,000 hrs*0.50 60,000

______ ______

Total estimated overhead 195,000 180,000

Estimated DLHs 150,000 120,000

Factory overhead/hr $1.30 $1.50Fixed overhead/ hr $0.80 $1.00


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of Overhead rates

Including or excluding of fixed overhead

Absorption costing

Fixed and variable expenses both are included

in overhead rates.

Direct costing

Only variable overhead is included inoverhead rates.

The fixed expense does not become a productcost but is treated as a period cost.


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Calculation of Factory Overhead Rate

Identifying the base to be used

Estimating the Activity level & Expenses

Classifying Expenses as Fixed or Variable

Establishing the Factory Overhead Rate


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Calculation of Factory Overhead Rate

Estimated factory overhead = Rate per direct labor hour


Factory overhead can be broken down into its fixedand variable components: Estimated fixed factory overhead = fixed portion of factory overhead rate


Estimated variable factory overhead = variable portion of factory overhead rate



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Factory OverheadActual

Accumulation of Actual Factory Overhead

The basic purpose for accumulating factory overheadis the gathering of information for purposes of control.

Control in turn requires :

Reporting costs to the individual department headsresponsible for them

And making comparisons with the amount budgetedfor the level of operations achieved.


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Accounting for Actual Factory

Overhead

Steps involved in the accounting for factoryoverhead transactions are:

Analysis

Journalizing Posting the factory overhead subsidiary

ledger and the factory overhead general

ledger control account.


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The principal source documents for recordingoverhead in the journal are:

Purchase vouchers

Materials requisitions Labor time tickets

General journal voucher.


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The mechanics of applying Factory

overhead

Factory overhead is applied after directmaterials and direct labor costs is available

Work in processApplied Factory Overhead

Applied Factory OverheadFactory Overhead Control


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The mechanics of applying Factory

overhead

A debit balance indicates that overhead has beenunderapplied

A credit balance indicates that overhead has beenover applied

These over- and under applied must be analyzed

carefully; as they are the source of much informationneeded by management for controlling and judgingthe efficiency of operations and the use of availablecapacity during the particular period.


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Disposition of Over or Under applied

Factory Overhead

If underapplied (Actual > Applied)

COGS

Factory Overhead

If overapplied (Actual < Applied)

Factory Overhead

COGS


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Assignment

The Carrcroft Company estimates its factory overhead for thenext period at $54,000. it is estimated that 36,000 units will beproduced at a material cost of $45,000. Production will require24,000 direct labor hours at an estimated cost of $120,000. Themachines will run about 1,600 hours.

Required: the predetermined factory overhead rate based on : Material cost

Units of production

Machine hours

Direct labor cost

direct labor hours.

Name five bases used for applying factory overhead. Whatfactors must be considered in selecting a particular basis?


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Variance Analysis

Spending Variance-a variance due to budgetor expense factors

Idle capacity Variance- a variance due to

volume or activity levels


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Actual factory overhead $292,000

Spending variance 750 unfavorable

Budget allowance-based on capacity utilized

Fixed factory overheads budgeted (in total)$125,000

Variable factory overheads

(190,000 actual hours* 0.875) 166,250 $291,250

Idle Capacity Variance 6,250 unfavorable

Applied Factory overhead(190,000 hrs*1.50) $285,000

Factory overhead underapplied _______

(292,000-$285,000) $7,000


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Spending Variance

The $ 750 is the difference between the actualfactory overhead incurred and the budget allowanceestimated for the capacity utilized i.e 190,000 directlabor hours.

The budget figures represents the budget for thelevel of the activity attained.

Favorable spending variance- when the actualoverhead is less than the budgeted overhead.

Unfavorable spending variance- when the actualoverhead is more than the budgeted overhead.


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Idle Capacity Variance

This occurs when the actual activity is below thenormal capacity.

This should not increase the factory overhead costs

but should be recorded separately and be considereda part of total manufacturing costs.

The idle capacity can be computed by multiplying the

idle hours by the fixed rate per unit.

It can also be computed by multiplying the totalbudgeted fixed expense by the idle capacity

percentage.


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Disposition of Over-or

Underapplied Factory Overhead

At the end of the fiscal year , overheadvariances may be:

Treated as a period cost Or divided between inventories and cost of

goods sold.


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Journal Entries

Cost of goods sold

Factory overhead

Or

Income Summary

Factory overhead

Ch 9 Factory Overhead - 2a

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