Accounting for Factory Overhead

Objectives:

Computation of Factory Overhead using different bases

Apply the concept of actual and applied overhead
Service Department Allocation
Compute for Overhead Variances
Activity Based Costing System
Introduction
Factory overhead are costs incurred in the production that is not under prime costs
(Direct Materials + Direct Labor). Costs that are not directly attributable to the
product are also overhead costs.

Examples of Factory Overhead:

Indirect Materials and Indirect Labor
Utilities (Heat, Light, Water) attributable to the factory
All other costs attributable to the factory
(Maintenance, Rent, Depreciation)
*The determination of overhead considers factors which includes, nature of the business, product
type, and other considerations and policies set by the company.
Types of Factory Overhead

Factory Overhead

Variable Overhead Fixed Overhead Mixed Overhead

Varies in total Constant in total Scatter graph Method
Constant Per Unit Varies per unit High Low Method
Directly Proportional Inversely Proportional Least square Method

Within the Relevant Range

Factors to consider in Computation of Overhead Rate.

N Estimated FOH
D Base to be used
Base to be used
Direct Labor Hours
Direct Labor Cost
Machine Hours
Direct Material Cost
Units of Production
Illustrative Problem
Candlelight Company estimates factory overhead at P450,000 for the next year.
It is estimated that 90,000 units will be produced at a material cost of P600,000.
Conversion will require an estimated 100,000 direct labor hours at a cost of
P3.00 per hour, with 45,000 machine hours.

Required: Compute the predetermined factory rate based on:

Material Cost
Units of Production
Machine Hours
Direct Labor Cost
Direct Labor Hours
Based on Material Cost and Units of Production

N Estimated FOH 450,000

.75 or 75%
Direct Material Cost 600,000
D Of DM

N Estimated FOH 450,000

5 per unit
D Units of Production 90,000
Based on Machine hours

N Estimated FOH 450,000

Machine Hours 45,000
D
10 per
Machine
Hour
Based on Direct Labor cost and Direct Labor Hours

N Estimated FOH 450,000

1.5 or 150%
Direct Labor Cost 300,000
D Of DL

N Estimated FOH 450,000

4.5 per DLH
D Direct Labor Hours 100,000
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