Factory Overhead Costing and

Control
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Learning Objectives
1. Identify cost behavior patterns.
2. Apply factory overhead using predetermined overhead
rate.
3. Accounting for actual and applied factory overhead.
4. Accumulate actual overhead costs.
5. Apply factory overhead estimates to the production.
6. Calculate and analyze differences between actual and
applied factory overhead.
Cost Behavior Analysis

That remain fixed in total

Cost Behavior

Fixed cost to the changes in level of

activity.
That varies in proportion
Variable Cost to the changes in level of
activity.
That has the
Semi variable cost characteristics of both
fixed and variable cost
Factory Overhead
The term ‘Factory Overhead’ is referred to
all indirect product costs which can not be
conveniently identified;
1. Indirect Material
2. Indirect Labor
3. Other Indirect manufacturing
costs
Distribution of Overhead
Step 1 Classification of Overhead

Step 2 Collection of Overhead

Step 3 Allocation of Overhead

Step 4 Apportionment of Overheads

Re-apportionment of service
Step 5 department overheads

Step 6 Absorption of Overheads

Step 1:
Classification of overhead
On the Basis of Function

• Production overheads
• Administrative Overheads
• Selling Overheads
• Distribution Overheads

On the Basis of Cost Behavior

• Fixed Overheads
• Variable Overheads

On the Basis of Cost element

• Indirect Material
• Indirect Labor
• Indirect Expenses
Step 2:
Collection of Overheads
Collection of overheads is the process of recording each
item of cost in the books of accounts maintained for the
purpose of ascertainment of cost of each cost center.
The data is normally collected from:
1. Stores Requisitions
2. Time or Job Card
3. Wage sheet
4. Purchase Document
5. Subsidiary Document
6. Journal Entries
Step 3:
Allocation of production overhead is a process to
charge those overheads to cost center which result solely
from the existence of that cost center
Overhead Costs Manufacturing Manufacturing Service Service
Department 1 Department 2 Department 1 Department 2

Indirect XX XX XX XX
Material

Indirect XX XX XX XX
Wages
Other XX XX XX XX
indirect
Expenses
Total XXX XXX XXX XXX
Overhead
Allocated
Step 4:
Apportionment of production overhead is a process in which
overheads cannot be directly allocated to products but must go through
a more roundabout system to charge them to the cost units.
Basis of Centers Overhead Cost Items
Apportionment to
Cost Centers
Overhead
Floor Area Occupied Building related expenses like rent and rates,
cleaning, heating and lightning, repairs,
depreciation and insurance of buildings.

Number of Workers All employees related costs like canteen,

supervision, personnel, medical and welfare
expenses.
Cost/Book value of Machine Machine related expenses e.g., depreciation,
repairs, etc.
Number of Store Cost of store keeping, store keeper wages, etc.
Requisitions
Step 5:
Re-apportionment of service overheads
Service cost centers are those that exist to
provide services to other cost centers in
the organization. They do not work directly
on producing the final product.
Consequently, their costs must be
re-apportioned to production cost centers
so that their overheads can be absorbed
into the final product.
Secondary Apportionment Methods
1. Non Reciprocal Apportionment
2. Reciprocal Apportionment
2.1 Repeated Apportionment method
2.2 Algebric Method
Absorption of Overhead
⚫ Absorption of overheads refers to
charging of overheads to individual
products or jobs. It is a process of
distribution of overheads allotted to a
particular department or cost center over
the units produced.
Methods
1. Percentage of Direct Labor Cost
2. Direct Labor Hours
3. Machine Hours
4. Percentage of Direct Material Cost
5. Percentage of Prime Cost
Cont…
Percentage of Direct Material Cost
Factory Overhead Rate = Amount of Production
overheads/ Direct Cost Material x 100
Percentage Of Direct Labour Cost
Factory Overhead Rate = Amount of Production
Overheads/ Direct Labour Cost x 100
Percentage Of Prime Cost Method
Factory Overhead Rate = Amount of Production
Overheads/ Prime Cost x 100
Cont…
Direct Labor Hour Rate
Factory Overhead Rate = Amount of Production
Overheads/ Direct Labor Hours
Machine Hour Rate
Factory Overhead Rate = Amount of Production
Overheads/ Machine Hours
Rate Per Unit Of Production
Factory Overhead Rate = Amount of Production
Overheads/ No. of Units of Production
 Journal Entries: for under/over applied
factory overhead
Work in process control A/c . . . . . ………. . Dr
To Factory Overhead applied A/c
(For charging applied factory overheads)

Factory Overhead applied A/c……. . . . . . . . Dr

To factory overhead control A/c
(For factory overhead applied account is closed to
factory overhead control account.)
Journal Entries: Overhead Variance
Considered as the Cost of Production
Factory overhead control A/c……. .. Dr
To cost of goods sold control A/c
( Over applied factory overhead is disposed off.)

cost of goods sold control A/c . . . . . . .Dr

To Factory overhead control A/c
(under applied factory overhead account is disposed off.)
Check:
The XYZ Ltd has the following information relating to
applied and actual factory overheads for the current
month:
Factory overheads, incurred Rs. 1,52,500
Applied factory overheads 1,98,500
Overapplied FOH Rs. 46000
Required: Calculate under/over applied FOH.
pass the journal entries
The End