Ch.12 FOH Carter.14th

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  • Chapter 12Factory Overhead: Planned, Actual, and Applied

    Prepared by Dewi Kartika for D3 Akuntansi FEUI

  • Chapter 12 Learning Objectives:Define factory overhead and its componentsDefine and calculate overhead ratesAccumulate actual factory overhead costsApply factory overhead using predetermined ratesDispose of over or underapplied factory overhead

  • The Nature of Factory OverheadFactory Overhead is generally defined as indirect material, indirect labor and other that cannot be conveniently identified with or charged directly to specific jobs, products, or other final cost objects.

  • The Nature of Factory OverheadThe characteristics of Factory overhead:

    Related to the productUnlike direct materials and direct labor, overhead is an invisible part of the finished product. Yet overhead is as much a part of a products manufacturing cost as direct materials and direct labor.

    Related to the volume of productionOverhead can be fixed, variable, or semivariable. As volume changes, the different overhead cost behavior patterns cause per-unit manufacturing cost to fluctuate considerably. As a result, some method is needed to determine an amount of overhead charged to the units produced

  • Use of a Predetermined Overhead RateBecause of the impossibility of tracing overhead to specific jobs or specific products, overhead cost is allocated across jobs and units.A predetermined overhead rate permits a consistent and logical allocation to each unit of output.It serves managements needs for product cost information, to identify inefficiencies, and to smooth out the illogical month-to-month fluctuations that would otherwise appear in reported unit costs.

  • Factor considered in Selecting overhead RatesBase to Be UsedPhysical OutputDirect Material CostDirect Labor CostDirect Labor HoursMachine HoursTransactions or activities

  • Factor considered in Selecting overhead Rates2. Activity Level SelectionTheoretical capacityPractical capacityExpected actual capacityNormal capacityEffect of capacity on overhead ratesIdle capacity versus excess capacity

  • Factor considered in Selecting overhead Rates3. Including or Excluding Fixed OverheadAbsorption CostingDirect Costing4. Use of a Single Rate or Several RatesPlantwide or blanket rateDepartment ratesSubdepartmental and activity rates5. Use of Separate Rates for Service Activities

  • Base to Be Used

    Ordinarily the base should be closely related to functions represented by the overhead cost being applied.If overhead is mostly labor oriented (costs of supervision and fringe benefits), then the proper base is probably direct labor cost or direct labor hours.When two or more bases result in approximately the same applied factory overhead costs for each job or product, the simplest, most easily measured base should be used.

  • Physical OutputPhysical 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

    The physical output base is satisfactory when a company manufactures only one product, or if the products are alike or closely related; otherwise, the method is generally unsatisfactory.Estimated Factory Overhead = Factory Overhead per unitEstimated units of production

  • Direct Materials Cost BaseIn 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

    The material cost base is of limited use, because in most cases no logical relationship exists between the direct materials cost of a product and the use or creation of factory overhead in its productionEstimated Factory Overhead x 100 = Factory Overhead as a percentage Estimated material cost of direct materials cost

  • Direct Labor Cost BaseThis methods 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 BaseThe 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 hourA job with 800 DLH, is charged 800 x $5 = $4,000 for factory overhead

    Recent years have seen a shift away from direct labor usage and toward increasing levels of automation. As a result, a direct labor hours base for overhead application has become less appropriate, often giving way to machine hours as the preferred base.Estimated Factory Overhead = Factory Overhead per direct labor hourEstimated direct labor hours

  • Machine Hour BaseWhen 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 MHSo, a job or product that requires 120 machine hours is charged 120 x $15 = $1,800 for Factory OverheadEstimated Factory Overhead = Factory Overhead per machine hourEstimated machine hours

  • Transaction BaseThe transaction-base approach to overhead allocation is popularly referred to as activity-based costing (ABC) and is discussed in detail in Chapter 14.

  • Selection of Activity LevelTheoretical CapacityIt is achieved if the plant or department producs at 100% of its rated capacity (produce at full speed without interruptions)Operating at theoretical capacity is unattainable goal for periods (month, quarter or year). Still, some managers use it, because it focuses attention on opportunities for improvement.

    Practical CapacityIt is improbable that any company can operate at theoretical capacity. Allowances must be made for unavoidable interruptions (maintenance, material delays, holidays, etc).Those factors reduce theoretical capacity to the practical capacity.

  • Selection of Activity LevelExpected Actual CapacityIt corresponds to the amount of output expected to be produced during the period

    Normal CapacityIt corresponds to the average activity over a time period long enough to level out the highs and lows

  • Selection of Activity Level Effect of Capacity on Factory Overhead RatesAt higher capacity levels, the rate is lower because the fixed factory overhead is spread over more allocation base (machine hour).See Exh. 12-1.

    Idle capacity Versus Excess CapacityIdle capacity results from a temporary lack of sales.Excess capacity results either from greater productive capacity than a company can expect to use, or from an imbalance in equipment or machinery.

  • Including or Excluding Fixed OverheadAbsorption CostingBoth fixed and variable costs are included in factory overhead rates.

    Direct CostingOnly variable factory overhead is included in overhead rates.

  • Calculation of an Overhead RateDetermined the activity level to be used for the base selected.Estimated or budgeted each individual overhead cost item at that activity level total estimated factory overhead.

    Factory Overhead rate = Estimated Factory Overhead cost Estimated activity level base

  • Calculation of an Overhead RateExample:DeWitt Products has an expected capacity level of 20,000 machine hours. At that activity level, factory overhead is estimated to total $300,000 (consist of fixed factory overhead amounted $125,000 and variable factory overhead amounted $175,000)

    FOH rate = Estimated Factory Overhead = $300,000 = $15/MH Estimated Machine hours 20.000

    $125,000 est. Fixed FOH = $6.25 Fixed portion of FOH 20,000 est. machine hours

    $175,000 est. variable FOH = $8.75 Variable portion of FOH20,000 est. machine hours

    Total FOH Rate = $15.00 per machine hours

  • Actual Factory OverheadSome 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 voucherMaterials requisitions- labor time tickets

  • Applied Factory Overhead and the Over- or Underapplied Amount

    At the end of the month or year, applied factory overhead and actual factory overhead are compared.

    Actual factory overhead:The amount of indirect cost incurred.

    Applied factory overhead:The amount of cost allocated to output.

  • Applied Factory Overhead and the Over- or Underapplied AmountIllustration:

    Applying Factory OverheadDeWitt Products predetermined factory overhead rate is $15 per machine hour, its actual machine hours totaled 18,900 and actual factory overhead totaled $292,000.

    The factory overhead applied:18,900 MH x $15 = $283,500The general journal entry:Work in Process283,500Applied Factory Overhead283,500The closing entry:Applied Factory Overhead283,500 Factory Overhead Control283,500

  • Applied Factory Overhead and the Over- or Underapplied Amount

  • Over- or Underapplied Factory OverheadUnderapplied: FOH applied < FOH Control (FOH Control has debit balance)Overapplied:FOH applied > FOH Control (FOH Control has credit balance)

    For DeWitt Products, FOH applied < FOH control $283,000 < $292.000 difference: $ 8.500 Underapplied

  • Disposition of Over or Underapplied FOH Close To COGSAllocate to Inventories and COGSNoYesThe amount is material?

  • Disposition of Over- or Underapplied AmountIf the amount of over- or underapplied factory overhead is insignificant:

    Income Summary8,500Factory Overhead Control8,500

    Or

    COGS8,500Factory Overhead Control8,500

  • Disposition of Over- or Underapplied AmountDeWitt ProductsIncome StatementFor Year Ending December 31, 20-Sales $1,600,000Less: COGS1,193,000 Underapplied FOH 8,500COGS Adjusted1,202,000Gross Profit 398.000

  • Allocation of Over or Underapplied FOH to Inventories and COGS

    Example: Spander Company had $4,000 of underapplied FOH, and the balances in inventories and COGS were:

  • Allocation of Over- and Underapplied FOH to Inventories and COGSThe over- or underapplied factory overhead usually is allocated to the three accounts in proportion to their balances:

    The journal entry:WIP (10% of $4,000) 400FG (18% of $4,000) 720COGS (72% of $4,000)2,880Factory Overhead Control4,000

    If factory overhead had been overapplied, the two inventories and COGS would be credited and Factory Overhead Control would be debited.

  • Changing Overhead RatesOverhead rates usually are reviewed periodically.Changes in production methods, prices, efficiencies, and sales forecasts make review and possible revision of overhead rates necessary at least annually.

  • - Finish -Any Question?

  • Exercise 12-1

  • Exercise 12-1

  • Exercise 12-4

  • Exercise 12-7

  • Exercise 12-11

  • Exercise 12-13

  • - The End -