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Accounting For Factory Overhead: Problems
Accounting For Factory Overhead: Problems
PROBLEMS
Problem 1
The Denmark Company estimates its factory overhead for the next period at 500,
000. It is estimated that 10, 000 units will be produced at a materials cost of 400, 000
and will require 25, 000 direct labor hours at an estimated cost of 250, 000. The
machines will run about 80, 000 hours.
Answer:
1. 500 000/400 000 x 100 = 125% of direct materials cost
Problem 2
The Marco Company budgeted overhead at P 255, 000 for the period for
Department A, on the basis of a budgeted volume of P 100, 000 direct labor hours. At
the end of the period, the Factory Overhead Control account for Department A had a
balance of P 270, 000; actual direct labor hours were P 105, 000
Required:
1. Compute for the overhead application rate
2. Compute for the applied factory overhead
3. Compute for the over or under-applied overhead
Answer:
1. Factory Overhead Rate = P 255, 000/100, 000 = P 2.55/DLHr.
Problem 3
Marvin Company’s estimated factory overhead for the year was P 456, 120 and
the actual overhead was P 470, 800. Machine hours were used in determining the
factory overhead application rate. There were P 84, 500 actual machines and P 81, 450
estimated machine hours during the year.
Required:
A. Prepare journal entries to record the following
1. The applied factory overhead
2. The actual factory overhead
3. The closing of the applied overhead account and actual factory account.
B. Assume the following amounts of applied factory overhead in each account.
Cost of goods sold 350 000
Finished goods inventory-end 100 000
Work in process inventory-end 23 200
Allocate the over or under-applied factory overhead to these three accounts.
Answer:
A. 1. Work in Process 473,200
Factory Overhead Applied 473,200*
*84, 000 x 5.60 = 473, 200
2. FO Control 470,800
Miscellaneous Accounts 470,800
Problem 4
The Ellery Corporation uses the job order cost system of accounting. Shown
below is a list of the jobs completed during the month of March showing the charges for
materials requisitioned and for direct labor cost.
Job Material Cost Direct Labor
123 300 600
124 1 080 940
125 720 1 400
126 4 200 5 120
Required:
Assuming that factory overhead is applied on the basis of direct labor costs and that the
predetermined rate is 180% compute:
1. The amount of overhead to be added to the cost of each job completed
2. The total cost of each job completed during the month.
Answer:
1. Job 123 Job 124 Job 125 Job 126
DL cost 600 940 1,400 5,120
FOH rate 180% 180% 180% 180%
Applied FOH 1,080 1,692 2,520 9,216
Problem 5
Thermal Corporation has two producing department and two service
departments labeled. P1, P2, S1, and S2, respectively. Direct costs for each department
and the proportion of services costs used by various departments are as follows:
Cost Direct Proportion of services used by:
Center Costs S1 S2 P1 P2
P1 90 000
P2 60 000
S1 20 000 .80 .10 .10
S2 32 000 .20 .50 .30
In calculating predetermined overhead rates, machine hours are used as the base in P1
and direct labor hours as the base in P2.
P1 P2
Machine hours 50 000 40 000
Direct labor hours 40 000 20 000
Requirements:
1. Allocate the service department costs to operating departments and compute the
factory overhead rate for P1 and P2 using the following methods:
A. Direct Method
B. Step method – start with S1
C. Algebraic Method
2. Assume the company uses just one basis for applying overhead to jobs going through
both P1 and P2, compute the overhead rate using direct labor hours as base.
Answer:
1. A. P1 P2 S1 S2
Direct Cost 90 000 60 000 20 000 32 000
Allocated FOH:
S1 10 000 10 000 (20 000)
S2 20 000 12 000 32 000
Total FOH 120 000 82 000
Base 50 000/mhrs 20 000/dlhrs
FOH Rate 2.4/mhrs 4.1/dlhrs
B.
Direct Cost 90 000 60 000 20 000 32 000
Allocated FOH:
S1 2 000 2 000 (20 000) 16 000
S2 30 000 18 000 (48 000)
Total FOH 122 000 80 000
Base 50 000/mhrs 20 000/dlhrs
FOH Rate 2.44/mhrs 4/dlhrs
C.
Direct Cost 90 000 60 000 20 000 32 000
Allocated FOH:
S1 3 143 3 143 31 429 25 143
S2 28 572 17 143 (11 429) (57 143)
Total FOH 121 715 82 286
Base 50 000/mhrs 20 000/dlhrs
FOH Rate 2.43/mhrs 4.01/dlhrs
S1 = 20,000 + 20% S2
S2 = 32,000 + 80% S1
Problem 6
The ABC Company has two service departments and two producing departments
Service Departments’ to costs:
Department 1 – Repair P 14,000
Department 2 – cafeteria 11,000
Producing Departments’ Factory OH Costs
Department A – Machinery 52,500
Department B – Assembly 48,000
Additional Information:
Department Square Feet Est. Direct Labor hours
Repair 1,500 3,500
Cafeteria 1,800 1,200
Machinery 2,000 2,300
Assembly 3,000 1,700
Total 8,300 8,700
The costs of the Repair Department are allocated on the basis of square feet. The costs
of the cafeteria Department are allocated on the basis of estimated direct labor hours.
The producing departments use estimated direct labor hours: 1,500 in Department A
and 1,250 in Department B.
Required: Allocate the total costs of the service departments to the producing
departments (compute the departments’ factory rate) by using the following:
1. Direct method
2. Step method - start with the repair Department
Answer:
1. Direct Method
Machinery Assembly Repair Cafeteria
Direct cost P 52,500 P 48,000 P 14,000 P 11,000
Allocated cost:
Repair 5,600* 8,400** ( 14,000)
Cafeteria 6,325*** 4,675**** ( 11, 000)
Total FOH P 64,625 P 61,075
Base 1,500DLHrs. 1,250 DLHrs
FO Rate P 43.08DLHr. P48.86/DLHr.
2. Step Method
Machinery Assembly Repair Cafeteria
Direct cost P 52, 500 P 48, 000 P 14, 000 P 11, 000
Allocated cost
Repair 4, 119* 6, 176** ( 14, 000) 3, 705***
Cafeteria 8, 455**** 6, 250***** ( 14, 705)
Total P 65, 074 P 60, 426
Base 1, 500 DLHrs. 1, 250 DLHrs
FO rate P 43.38/DLHr P48.34/DLHr
.
Answer:
P1 P2 S1 S2
Direct cost 120, 000 80, 000 25, 000 10, 000
Allocated
S1 13, 333 6, 667 ( 26, 667)* 6, 667
S2 8, 333 6, 667 1, 667 (16, 667)**
Total 141, 666 93, 334
Problem 8
Megastar Company’s normal operating capacity is estimated at 95,000 machine hours
per month. At this operating level, fixed factory overhead is estimated to be P34, 200
and variable factory overhead is estimated to be P41,800. During November, the
company operated 100,000 machine hours. Actual factory overhead for the month
totalled P78, 600.
Required: Compute for the following
1. The over or under applied factory overhead.
2. The spending variance.
3. The idle capacity variance.
Answer:
Total Per Mach.Hr.
Fixed 34,200 0.36 (34,200/95,000)
Variable 41,800 0.44 (41,800/95,000)
76,000 0.80
Problem 9
Normal annual capacity for Abner Company is 72,000 units, with fixed factory overhead
budgeted at P33, 840 and an estimated variable factory overhead rate for P4.20 per
unit. During October, actual production was 5,400 units, with a total overhead of P15,
910.
Problem 10
Norman Corporation uses a flexible budget system a prepared the following
information for 2012.
Normal capacity Maximum capacity
Percentage of capacity 80% 100%
Direct labor hours 48,000 60,000
Total budgeted factory overhead P252, 000 P270, 000
Norman planned to operate at normal capacity but actually operated at 90% of
maximum capacity during 2012. The actual factory overhead for 2012 was P273, 000.
Requirements:
1. Using HI-LO method, compute for the variable rate per hour.
2. Determine the fixed portion of the budgeted factory overhead.
3. Compute for the spending variance.
4. Compute for the idle capacity variance.
Answer:
1. Variable rate/hour = _270, 000 – 252, 000_
60, 000 - 48, 000
= P1.50/DLHr.
High Low
2. Total 270, 000 252, 000
Less: Variable
(60, 000 x 1.50) 90, 000
(48, 000 x 1.50) _______ __ 72, 000_
Fixed 180, 000 180, 000
Problem 11
The strawberry Corporation has the following information relating to applied
and actual factory overhead.
Factory overhead control P30, 500
Applied factory overhead 39,700
Applied factory overhead costs are in the following accounts.
Cost of goods sold P32, 000
Ending work in process inventory 3,500
Ending finished goods inventory 4,200
Required:
a. Allocate the under or overapplied factory to those accounts distorted by using
what turned out to be an incorrect factory overhead application rate.
b. Prepare the end-of-period entries.
Answer:
a. Actual factory overhead 30,500
Less: Applied factory overhead _39,700_
Overapplied factory overhead – favorable (9, 200)
Problem 12
For many years Tinor Company has used a manufacturing overhead rate based on
direct labor hours. A new plant accountant has suggested that the company may be able
to assign overhead costs to products more accurately by using an activity-based costing
system. The accountant explains that by creating an overhead rate for each production
activity that causes overhead costs, the resulting product costs will reflect an accurate
measure of overhead cost. The direct material cost is P120 per unit. The budgeted
hours are 8,030 direct labor hours. The accountant has identified activity centers to
which overhead costs are assigned. The cost pool amounts for these centers and their
selected activity drivers for 2012.
Required:
1. Compute the unit cost for each product using direct labor hours as the overhead
application base.
2. Compute the unit costs for each product using activity-based costing.
Answer:
1. Product A Product B
Direct materials (50 x P120) P 6,000 (100 x P120) P 12, 000
Direct labor 1,000 3, 000
Factory overhead (100 x P 25) 2,500 (300 x P 25) 7, 500
Total manufacturing cost P 9,500 P 22, 500
No. of units 50 100_
Cost per unit P 190/unit P 225/unit
2. Product A Product B
Direct materials (50 x P120) P 6,000 (100 x P120) P 12,000
Direct labor 1,000 3,000
Factory overhead
Material handling (40 x P50) 2,000 (20 x P50) 1,000
Scheduling & setup (7 x 200) 1,400 (5 x 200) 1.000
Design section (5 x P 107.50) 537,500 (3 x 107.50) 322.50
No. of parts (10 x 100) 1,000 (6 x 100) 600_
Total costs P 11,937.50 P 17,922.50
No. of units 50__ 100_
Cost per unit P 238.75/unit P 179.23/unit
TRUE-FALSE QUESTIONS
Indicate whether the following statements are true or false by inserting in the blank
space provided, a capital “T” for true or “F” for false.
ANSWER:
1. T 6. T 11. F
2. F 7. T 12. F
3. T 8. T 13. T
4. T 9. F 14. T
5. T 10. T 15. T
MULTIPLE CHOICES
1. Manufacturing overhead applied was P120, 000, while actual overhead incurred
was P124, 000. Which of the following is always true of the above?
a. Out-of-pocket
b. Marginal
c. Variable
d. Fixed
a. Direct method
b. Step method
c. Out-of-step method
d. Algebraic method
5. The variable factory overhead application rate under the normal, practical, and
expected activity levels would be the same
a. Expect for normal volume
b. Expect for practical capacity
c. Expect for expected activity
d. For all three activity levels
6. Which productive capacity level does not consider product demand, but at the same
time accounts for anticipated and unavoidable interruptions in production?
7. Which productive capacity level does not have provision for either a lack of sales
orders or interruptions in production (due to work stoppages, machine repairs and
maintenance, set-up time, holidays, weekends, etc.
8. Which productive capacity level is based in estimated production for the next period?
10. Which of the following is not true of the methods of allocating service department
costs to user departments?
a. A cause and effect basis is the preferred method of allocation
b. Each method allocates the same total cost when there are no interservice
department activities.
c. If a cause and effect relationship cannot be established for service department
costs, then an allocation cannot be conducted.
d. The level of detail associated with allocating service department costs should
be decided on a cost-benefit basis.
Answer:
1. c 6. d
2. c 7. c
3. d 8. a
4. b 9. d
5. d 10. a
The base to be used for allocating the cost of Building and ground maintenance is
square feet and for the storeroom cost is the number of requisition. Direct labor hours
are used to compute the producing departments’ factory overhead application rate
1. Using the direct method, what is Department A’s factory overhead rate?
a. P 30.30
b. P 47.46
c. P 55.70
d. P 60.53
2. Using the algebraic method, compute for the building and Grounds Maintenance
Department total amount to be allocated to the Storeroom Service Department
and both producing departments. (Take all calculations of hour decimal places
but round all answers to the nearest peso)
a. P 21,960
b. P 22,584
c. P 23,467
d. P 24,722
Boone Manufacturing had worked on two jobs, job 101 and Job 102 last year. The
estimated manufacturing overhead for last year was P 30,000 (fixed) and P5.00 per
direct labor hour (variable) and estimated 2,000 direct labor hours. The factory
overhead control account has a balance of P 37,000. Actual hours used for Job 101 was
1,200 and for Job 102 were 1,000.
The following information relates to Fay Corporation for the past accounting period.
Producing Departments Service Departments
C D A B
Direct costs P 15,000 P 20,000 P 80,000 P 60,000
Proportion of service by A to:
B 10%
C 60%
D 30%
5. Using the algebraic method, department A’s cost allocated to department C is:
a. P 48,000
b. P 58,800
c. P 60,619
d. P 98,000
6. Using the algebraic method, department B’s cost allocated to department C is:
a. P 7,794
b. P 13,192
c. P 14,021
d. P 29,021
AMR Corp. currently uses a firm-wide overhead application based on expected direct
labor hours.The following information is anticipated at the beginning of the year.
Department A Department B
Direct materials P 25.00/1b. P 17.00/1b.
Direct labor hours 10,000 5,000
Machine hours 2,000 10,000
Overhead P115, 000 P85, 000
Labor rate P 15.00/hr P 12.00/hr
7. If the firm maintains the current method, the overhead application rate is:
a. P 7.67/hr
b. P11.50/hr
c. P13.33/hr
d. P20.00/hr
The following information relates to Donna Corporation for the last year. Donna uses
direct labor hours as anoverhead base.
Estimated direc labor hours 136,000 hours
Estimated manufacturing overhead costs P 108,800
Actual manufacturing overhead costs 108,480
Applied manufacturing overhead costs 110,000
10. What was the actual number ofn direct labor hours worked last year at Donna?
a. 86,794 hours
b. 88,320 hours
c. 135,600 hours
d. 137,500 hours
D’Santos uses a job-order cost system with machine hours as an overhead base. The
following information relates to D’Santos for last year:
Estimated machine hours for the year 42,000
Actual machine hours for the year 40,800
Predetermine overhead rate P1.50 per MH
Underapplied factory overhead P 2,600
Justine Company budgeted total variable overhead costs at P 180,000 for the current
period. In addition, they budgeted costs for factory rental P215, 000, costs for
depreciation of office equipment at P12, 000 costs for office rent at P92,000, and costs
for deprecation of factory equipment at 38, 000. All these costs were based upon
estimated machine hours 80,000. At the end of the period, the Factory Overhead control
account had a balanced of P387, 875. Actual machine hours were 74,000.
12. What as the over or underapplied factory overhead for the period?
a. P 12,650 overapplied
b. P 12,650 uderapplied
c. P 108,850 overapplied
d. P 108,850 underapplied
Candice Company uses activity-based costing to determine the unit product costs for
external reports. The company has two products: Candy A and Candy B. The annual
production sales of Candy A are 10,000 units and of Candy B are 4,000 units. There are
three overhead centers, with estimated overhead costs and expected activity as follows:
13. The overhead cost per unit of Candy A under activity-based costing is
a. P6.00
b. P9.70
c. P1.50
d. P3.00
e.
The following information relates to Pure Corporation for the past accounting period .
Service Department Direct Cost
A P80, 000
B 60, 000
Producing Department
C 15, 000
D 20, 000
Proportion of service by A to:
B 10%
C 60%
D 30%
Proportion of service by B to:
A 30%
C 20%
D 50%
Marvine Company uses a job costing system and applies overhead to products on the
basis of direct labor cost. Job no. 75 the only job in process on January 1 had the
following costs assigned as of that date: direct materials, P40, 000; direct labor, P80,
000; and factory overhead, P120, 000. The following selected costs were incurred
during the year 2016:
Traceable to jobs:
Direct Materials P 178,000
Direct labor 350,000 P523, 000
Not traceable to jobs:
Factory materials and supplies 46,000
Indirect labor 235,000
Plant maintenance 73, 000
Depreciation on factory equipment 29, 000
Other factory costs 76, 000 459, 000
Marvin’s profit plan for the year included budgeted direct labor of P320, 000 and
factory overhead of P384, 000
15. Assuming no work-in-process on Dec. 31, Marvin’s overhead for the year as
a. P11,000 over-applied
b. P24,000 over-applied
c. P39,000 under-applied
d. P11,000 under-applied
Allocations are made in the order shown above. Budgeted costs for next quarter are
P39, 000 for Personnel and P68, 000 for Maintenance.
16. What is the total amount of service cost that should be allocated to the Printing
Department under the direct and step method?
Direct method Step method
a. P68,700 P77,070
b. P77,070 P78,000
c. P78,000 P81,100
d. P78,000 P77,070
Super Soak produces two types of sponges: Natural and Super-suds. Both are produced
on the same assembly line but are considered separate divisions. The company wants
to know how to allocate manufacturing overhead to the products. The relevant data for
the possible allocation bases are given below
Natural Super-Suds
Materials used P 40,000 P 25,000
Direct labor hours 20,000 35,000
Direct labor costs P 100,000 P 145,000
Machine hours 6,000 15,000
Outputs units 25,000 30,000
18. Using machine hours, how much overhead will be allocate to the Natural?
a. P13,714
b. P28,500
c. P17,455
d. P34,286
Hackers Corp. accumulated the following information for its products. A and B,
Product A Product B Total
Production volume 2, 000 1, 000
Total direct labor hours 5, 000 20, 000 25, 000
Setup cost per bath P 1, 000 P 2, 000
Bath size 100 50
Total set-up cost incurred P20, 000 P 40,000 P60, 000
Direct labor hour per unit 2 1
A traditional costing system would allocate set-up costs on the basis of direct labor
hours. An ABC system would trace costs by spreading the cost per batch over the units
in a batch.
19. What is the set-up cost per unit of Product A under each costing system?
Traditional ABC System
a. P4.80 P10.00
b. 2.40 10.00
c. 40.00 200.00
d. 4.8 20.00
A summary of the usage of the service department services by other service
departments as well as by the two producing departments is as follows:
20. If the direct method of allocation is used, how much of the supervision department’s
cost would be allocated to the building occupancy department?
(Start with Building occupancy, then Supervision)
a. 0
b. P 1, 750
c. P 3, 500
d. P 5, 250
21. If the direct method of allocation is used, how much of the equipment maintenance
costs would be allocated to production department No. 1?
a. 0
b. P 13, 500
c. P 16, 500
d. P 30, 000
22. If the step method of allocation is used, how much would be allocated from
supervision to production department No. 1
a. P 14, 000
b. P 16, 471
c. P 17, 600
d. P 18, 500
23. If the step method of allocation is used, how much would be allocated from
supervision to building occupancy?
a. 0
b. P 1, 750
c. P 2, 200
d. P 2, 444
Stargazer Company logged 7, 250 machine hours for the month of June. P42, 500 was
spent for manufacturing overhead and this overhead is allocated on the basis of
machine hours. The Company operates 5 departments; however, one department was
closed for the month of June due to poor market conditions for its product. It was
decided that this department should be allocated a lump sum of 5, 000 as its share of
June overhead.
24. If this policy is followed, how much overhead would be charged to Department 2,
which used 1, 750 machine hours?
a. P 1, 207
b. P 9, 052
c. P 10, 259
d. P 20, 714
Consolidated Magnets, Inc. has 3 plants. Each plant produces identical magnets but uses
only different manufacturing processes. Each plant sells to different customers, setting
its prices. Headquarters’ costs total P 350, 000. Factors that are considered for
allocation purposes are as follows:
Payroll Unit Volume Peso Volume Assets
Plant A P 335, 000 15, 000 P 500, 000 P 300, 000
Plant B 450, 000 19, 000 900, 000 600, 000
Plant C 280, 000 17, 500 750, 000 800, 000__
Totals P 1, 065, 000 51, 500 P 2, 150, 000 P 1, 700, 000
25. What is the amount of headquarters’ costs to Plant A if payroll is used as the
allocation base?
a. P 75, 053
b. P 92, 019
c. P 110, 094
d. P 1, 019, 357
26. What is the amount of headquarters’ cost allocated to Plant B if sales volume, in
pesos, is used as the allocated base?
a. P 81, 395
b. P 129, 126
c. P 146, 512
d. P 268, 605
Camille Company has underapplied overhead of P 45, 000 for the year ended December
31. Before disposition of the underapplied overhead, selected December 31 balances
from Camille Company’s records are as follows:
Cost of goods sold P 720, 000
Inventories:
Direct Materials 36, 000
Work in process 54, 000
Finished goods 90, 000
Under Camille’s cost accounting system, over or underapplied overhead is allocated to
appropriate inventories and cost of goods sold based on year-end balances.
27. In its income statement, Camille should report cost of goods sold of
a. P 682, 500
b. P 684, 000
c. P 756, 000
d. P 757, 500
Happy Burger Co. has a commissary that supplies food and other products to its
restaurants. It has two service departments, computer services (S1) and administration
and maintenance (S2), which support two operating departments, food products (P1)
and supplies (P2). As internal auditor, you are checking the procedures for cost
allocation and find the following results:
Costs allocated to P1:
P 30, 000 from S1
? from S2
Costs allocated to P2:
P 15, 000 from S2
? from S1
Total costs for the two service departments – P 80, 000
S2’s services are provided as follows:
20% to S1
50% to P1
30% to P2
28. Using direct method of allocating service department costs, compute the total
service department costs incurred by S2.
a. zero
b. P 20, 625
c. P 40, 000
d. P50, 000
Porthos Co. has identified an activity cost pool to which it has allocated estimated
overhead of P 1, 920, 000. It has determined the expected use of cost drivers for that
activity to be 160, 000 inspections. Product W require 40, 000 inspections and Product
x require 30, 000 inspections.
29. The overhead assigned to product W is
a. P 40, 000
b. P 640, 000
c. P 360, 000
d. P 480, 000
30. The overhead assigned to product X is
a. P 30, 000
b. P 640, 000
c. P 480, 000
d. P 360, 000
ANSWER:
1.