FACTORY OVERHEAD COST STANDARDS 1.

50

P35.00
1.50
P52.50

The development of standards for factory overhead is not as simple as for direct materials and
direct labor. This is because factory overhead is composed of many cost items – that is, all
manufacturing costs other than prime costs. Examples are indirect materials, indirect labor, insurance,
light, water, depreciation and others. Furthermore, unlike materials and labor which are assumed to
be purely variable costs, factory overhead is composed of variable costs, fixed costs and mixed costs.
Thus, there is a need to first segregate mixed costs into their variable and fixed components. As with
direct labor, the price and quantity components for overhead are expressed in terms of rate and
hours.
A. Standard factory overhead rate

It is a predetermined rate that is usually based on direct labor hours or machine hours. The
first step in calculating the overhead rate is to determine the activity level to be used for the base
selected and estimate or budget individualexpense at the estimated activity level in order to
arrive at the total standard factory overhead. The individual overhead expenses must also be
classified into fixed or variable expenses. After the activity level for the selected base and the
factory overhead have been estimated, the overhead rate can already be computed.

B. Standard factory overhead hour

Since factory overhead is applied based on a cost driver like direct labor hours or machine
hours, the standard hour for labor or for machine is used as standard number of hours. Consider
the following overhead costs:
Factory Overhead Costs Fixed Variable Total
Supervisors P70,000 P70,000
Indirect labor 9,000 P66,000 75,000
Overtime Premium 9,000 9,000
Factory supplies 4,000 21,000 25,000
Repairs and maintenance 3,000 8,000 11,000
Electric power 2,000 20,000 22,000
Fuel 1,000 600 5,000 6,000
Water 3,000 3,400 4,000
SSS contributions 1,500 15,000 18,000
PHIC contributions 1,500 6,500 8,000
PAG-IBIG contributions 2,000 2,500 4,000
Pensions 2,000 18,000 20,000
Vacations and holiday pay 1,400 15,000 17,000
Group insurance 20,000 5,600 7,000
Depreciation – building 11,000 - 20,000
Depreciation – equipment 4,000 - 11,000
Property tax 3,000 - 4,000
Fire insurance P60,000 - 3,000
Total 6,000 P120,000 P180,000
Divide by: Practical capacity 6,000 6,000
Standard FOH rate/DLH P10 P20 P30

STANDARD FOH/UNIT
Standard FOH/hr P30.00
Multiply by: DLH per unit 1.5
Standard FOH/unit P45.00
To complete the standard cost for one t-shirt:
Direct materials cost P42.00
Direct labor cost 52.50
Factory overhead cost 45.00
Standard cost/unit P139.50