Miranda, Sweet Jenesie V.

Chapter IV: Factory Overhead Accounting

III- BSBA – A

Exercise:
Factory Overhead 1.All cost incurred in the factory that are not chargeable directly
to the finished product.
Variable Costs 2.The costs that vary in direct proportion to volume changes
Type B 3.It varies continuously, but not in direct proportion to volume
changes.
Semi Variable Costs 4.The costs that have both characteristics of variable and fixed
costs.

Accounting for Actual Factory Overhead 5.Using this method, the company must first identify activities
in the factory that are creating costs.
Flexible Budget 6.It is used to establish predetermined factory overhead rates by
dividing the budgeted factory overhead.
Budgeting Factory Overhead 7.It is management’s operating plan expressed in quantitative
terms.
High-Low Method 8.A technique that compares a high volume and its related cost to
a low volume with its related cost.
Observation Method 9.It is used to detect a pattern of cost behaviour by reviewing
past costs and volume data.
Scattergraph Method 10.Estimates straight line along which the semi variable costs
will fall.

Multiple Choice:
B 1. It uses the amount of direct labor cost that has been charged to the job as the basis for applying
factory overhead.
a. indirect labor cost method
b. b. direct labor cost method
c. c. labor cost
d. d. both a and b
A 2. Posh Perfumes, Inc., budgeted for 6,000 bottles of ‘‘Monique’’ during the month of June. Its unit
cost was $10, consisting of direct materials, $3.00; direct labor, $4.50; fixed factory overhead, $1.50; and
variable factory overhead, $1.00. The unit cost of ‘‘Monique’’ would be $_____________ if 5,000 bottles
were manufactured and $______________ if 7,500 bottles were manufactured.
Show your solution:

a. 5,000 units 7,500 units

Direct materials ............................. $ 3.00 $3.00
Direct labor ................................... 4.50 4.50
Fixed overhead ............................. 1.80* 1.20**
Variable overhead .......................... 1.00 1.00
Unit cost .................................... $10.30 $9.70
b. 5,000 units 7,500 units
Direct materials ............................. $ 3.00 $3.00
Direct labor ................................... 4.50 4.50
Fixed overhead ............................. 1.80* 1.20**
 Variable overhead .......................... 1.00 1.00
Unit cost .................................... $5.30 $4.70
Solution:
*(6,000 x 1.50) / 5,000 = 1.80
**(6,000 x 1.50) / 7,500 = 1.20
A.3.It is used to determine mathematically a line of best fit through a set of plotted points.
a. Method of Least Squares
b. Observation Method
c. Scattergraph Method
d. High-Low Method
D.4.The cost of the service department that renders service to the greatest number of of other
departments.
a. Scattergraph Method
b. Service Distribution or Step Down Method
c. Method of Least Squares
d. Direct Distribution Method
D.5.A method that distributes costs by simultaneous equations.
a. Direct Distribution Method
b. Method of Least Squares
c. Observation method
d. Algebraic Distribution method

Problem
1. Classify each of the following items of factory overhead as either a fixed or a variable cost. (Include
any costs that you consider to be semivariable within the variable category. Remember that variable costs
change in total as the volume of production changes.)
Fixed cost a. Indirect labor
Variable cost b. Indirect materials
Fixed cost c. Insurance on building
Variable cost d. Overtime premium pay
Fixed cost e. Depreciation on building (straight-line)
Variable cost f. Polishing compounds
Fixed cost g. Depreciation on machinery (based on machine hours used)
Variable cost h. Employer’s payroll taxes
Fixed cost i. Property taxes
Variable cost j. Machine lubricants
Fixed cost k. Employees’ hospital insurance (paid by employer)
Variable cost l. Labor for machine repairs
Fixed cost m. Vacation pay
Fixed cost n. Janitor’s wages
Fixed cost o. Rent
Variable cost p. Small tools
Fixed cost q. Plant manager’s salary
Fixed cost r. Factory electricity
Variable cost s. Product inspector’s wages
2. Copper Mountain Company has accumulated the following data over a six-month period:

Month Indirect Labor Hours Indirect Labor Costs

January 400 $ 6,000
February 500 7,000
March 600 8,000
April 700 9,000
May 800 10,000
June 900 11,000
Total 3,900 $ 51,000
Separate the indirect labor into its fixed and variable components, using the high-low method.

Answer:
Variable Cost
Labor Hour Labor Cost
High Volume 900 P 11,000.00
Low Volume 400 6,000.00
Charge 500 P 5,000.00

Variable cost per unit (P 5,000 / 500 hours) = P 10

Fixed Cost
Labor Hours(400) Labor Hours(900)
Total Cost P 6,000.00 P 11,000.00
Variable Cost at 10 per unit 4,000.00 9,000.00
Fixed Cost Remainder P 2,000.00 P 2,000.00

3. Scentsation, Inc., budgeted for 12,000 bottles of perfume Oui during the month of May. The unit cost
of Oui was $20, consisting of direct materials, $7; direct labor, $8; and factory overhead, $5 (fixed, $2;
variable, $3).
a. What would be the unit cost if 10,000 bottles were manufactured? (Hint: You must first determine the
total fixed costs.)
Answer:
GIVEN: 12,000 bottles month of May
P12 unit cost
P 7 Direct Material
P 8 Direct Labor
P 5 Factory Overhead ( fixed P 2; variable P 3)
Direct Materials P 7.00
Direct Labor 8.00
Variable Overhead 3.00
Fixed Overhead 2.40 - ( 12,000 x 20) /10,000 = 2.40
P 20.40 - Unit cost of 10,000 bottles of perfume

b. What would be the unit cost if 20,000 bottles were manufactured?

Answer:
Direct Materials P 7.00
Direct Labor 8.00
Variable Overhead 3.00
Fixed Overhead 1.20 - ( 12,000 x 20) /10,000 = 1.20
P 19.20 - Unit cost of 20,000 bottles of perfume

c. Explain why a difference occurs in the unit costs.

Answer:
It made a difference in the unit cost because of the number of bottles manufactured for the month
of May, 12,000 bottles of perfume were produced, given the unit cost of P 20.00. The10,000 bottles will
automatically increase its unit cost because it is lower than the first number of bottles produced. The
20,000 bottles decrease its unit cost because it is higher than the fist number of bottles product.

4. RDI Co. had a year-end remaining debit balance of $15,000 in its under-and overapplied factory
overhead account. The balance was considered to be large and, therefore, should be closed to Work in
Process, Finished Goods, and Cost of Goods Sold. The year-end balance of these accounts, before
adjustment, showed the following: Work in Process, $35,000; Finished Goods, $65,000; and Cost of
Goods Sold, $100,000. The prorated amount of the underapplied factory overhead that is chargeable to
each of the accounts would be Work in Process, $_______________, Finished Goods, $_____________,
and Cost of Goods Sold,$________________.
Answer: Year End Balances % of total
Work in Process P 35,000 17.50%
Finished Goods 65,000 32.50%
Cost of Goods Sold 100,000 50.00%
Total P 200,000 100%
Solution:
15,000 year end remaining
x 17.50% % of total
P 2,625 Work in progress

15,000 year end remaining

x 32.50% % of total
P 4,875 finished goods

15,000 year end remaining

x 50% % of total
P 7,500 cost of goods sold
5. If the ABC Company uses the machine hour method to apply factory overhead and the predetermined
overhead rate is Php20 per hour, $__________ is the amount that should be charged to Job 2525 for
factory overhead and $__________ would be the total cost of the job. Assume that direct materials used
totaled $3,000; direct labor was $2,200; direct labor hours were 150; and machine hours were 175.
Answer:
GIVEN:
P20 Per Hour
P 3,000 Direct Material used
P 2,200 Direct Labor
150 Direct labor hours
175 Machine hours

Solution:
P 20 Per hour
x 175 Machine Hours
P 3,500 Factory Overhead
P 3,000 Direct Material used
P 2,200 Direct Labor Cost
P 3,500 Factory Overhead
P 8,700 Total Cost of job