Chapter 5 Accounting for Factory Overhead

FACTORY OVERHEAD COSTS (Manufacturing Overhead)

- incurred in the manufacturing process other than DM and DL
- Indirect costs associated with the production of certain products
- These costs are later charged to an expense account once the
corresponding product is sold.

1. Indirect Materials - materials needed for production but is not directly

Computation:
used as raw materials (factory supplies, packaging, tools, cleaning supplies,
lubricants, fuels etc.)
Make sure that the base used will be related to the FOH to be calculated.
2. Indirect Labor - salaries off personnel who are not directly associated in
creating the products.
Service Departments - not revenue generating
3. Other Manufacturing Expenses - factory rent, insurance, depreciation,
- serves income generating departments
utilities, property taxes, security etc.

Each service department serves every other department. Costs from several
service departments are to be allocated to the production department.
Factory Overhead Control - actual amount
Factory Overhead Applied - estimated amount Service Department Allocation
1. Direct Method - kay production lang inaallocate yung cost, wala siyang
How do we estimate FOH? pakialam sa ibang service department.
*Capacity of Production 2. Step Method - there would be order of allocating the cost of a specific
1. Theoretical (Maximum or Ideal) - assumes that the depts/plants service dept.
production are without any interruption, nothing will go wrong in the - basis of allocation could be based on largest amount or services provided,
production if not applicable, it would be based on the dept with the largest cost
- gives no allowance to human and non human errors 3. Algebraic Method - compute for the true cost of each service dept and
- it is a production in FULL EFFICIENCY distribute it according to the ratio.
- denominator to be used would be the maximum output the plant could
produce
2. Practical = Theoretical - Unavoidable Operating Interruptions
- capacity of plant to produce with allowance to internal factors
3. Normal = Practical - Loss of productive capacity due to external factors
- commonly used
- considers both internal and external factors
- considers the seasonal and cyclical demand of the product
- customers based
4. Expected (Budget)
- number of capacity depends on the budget
- ‘flexible predetermined overhead rate’

Over or Under-applied Factory Overhead

- difference between actual and applied FOH is the variance which is
eliminated at the end of the period
1. Over-applied - mas mataas si applied kay actual
2. Under-applied - mas mataas si actual kay applied

Predetermined Overhead Rate

1. Plant-wide or Blanket Rate - regardless of the number of units per job,
isa lang ang gagamiting OH rate
2. Departmental Overhead Rate - each job will have different - True cost refers to the amount of total cost each service department has
predetermined OH rate including costs from other departments.

- Replacing of variable should only be one at a time.

- When it involves three variables, eliminate one. The two equations should
only have two similar variables.