Factory Overhead: Planned, Actual, and Applied
1
The Nature of Factory Overhead
 Factory Overhead is generally defined
as indirect material, indirect labor and
other factory expenses which cannot be
directly identified with specific jobs,
products, or services.
2
Use of a Predetermined Overhead Rate
 Because of the impossibility of tracing overhead to
specific jobs or specific products, overhead cost is
apportioned among jobs and units.
 A predetermined overhead rate permits a
consistent and logical allocation to each unit of
output.
3
Basis used in predtermined overhead Rates





Physical Output
Direct Material Cost
Direct Labor Cost
Direct Labor Hours
Machine Hours
4
Physical Output
 Physical output or units of production is the simplest base
for applying factory overhead
Estimated Factory Overhead = Factory Overhead per unit
Estimated units of production
 Example:


If Estimated Factory overhead is $300,000 and the company intends to
produce 250,000 units during the next period, then the FOH per unit is
charged $1.2 ( $ 300.000 : 250.000 units).
Then an order with 1,000 completed units, is charged 1,000 x $1.2 = $1,200
of Factory Overhead
5
Direct Materials Cost Base
 In some companies, a study of past costs reveals a high
correlation between direct materials cost and overhead
Estimated Factory Overhead x 100 = Factory Overhead as a percentage
Estimated material cost
of direct materials cost
 Example:


If Estimated Factory overhead totals $300,000 and est. materials cost
$250.000, then the FOH rate is $300,000 : $250,000 = 1.2 or 120 % of its
direct materials cost.
So, if the materials cost for an order is $5,000, Factory Overhead charged
to the order would be $5.000 x 1.2 = $6,000
6
Direct Labor Cost Base
 This method’s use is logical when a strong
relationship between direct labor cost and factory
overhead exists and hourly rates of pay are similar
for similar work.
Estimated Factory Overhead x 100 = Factory Overhead as a percentage
Estimated direct labor cost
of direct labor cost
 Example:
 If Estimated Factory overhead is $300,000 and total direct labor
cost is estimated at $500,000, then FOH rate is $300,000 :
$500,000 = 0.6 or 60 %.
 So, a job or product with a direct labor cost $12,000 is charged
$12.000 x 60% = $7,200 for Factory Overhead.
7
Direct Labor Hour Base
 The use of the direct labor hour base is justified if there is a
strong relationship between direct labor hours and factory
overhead
Estimated Factory Overhead = Factory Overhead per direct labor hour
Estimated direct labor hours
 Example:


If estimated Factory overhead totals $300,000 and direct labor hours are
est. 60,000, then factory overhead rate is ($300.000 : 60,000) = $5 per
direct labor hour
A job with 800 DLH, is charged 800 x $5 = $4,000 for factory overhead
8
Machine Hour Base
 When machines are used extensively, machine
hours may be the most appropriate basis for
applying overhead.
Estimated Factory Overhead = Factory Overhead per machine hour
Estimated machine hours
 Example:
 If estimated factory overhead totals $300,000 and a total of
20,000 machine hours are estimated, the FOH rate is $300,000 :
20,000 machine hours (MH) = $15 per MH
 So, a job or product that requires 120 machine hours is charged
120 x $15 = $1,800 for Factory Overhead
9
Applied Factory Overhead
It is the amount of overhead included in the cost of an
item or job.
= Actual Activity X Predetermined FOH Rate
= 20000 hours X $15
= 300,000
10
Actual Factory Overhead
 Some actual factory overhead costs are recorded
when incurred, as transactions are journalized and
posted to general and subsidiary ledgers.
 A basic objectives of accumulating factory
overhead is to provide information for control
(compare the budgeted amount with the actual
incurred).
 Source documents used for recording overhead
are:
 Purchase vouchers
 Materials requisitions
- general journal voucher
- labor time tickets
11
Applied Factory Overhead and the Over- or
Under applied Amount
 At the end of the month or year, applied factory
overhead and actual factory overhead are
compared.
Actual factory overhead:
$140,000
The amount of indirect cost incurred.
Less: Applied factory overhead:
The amount of cost allocated to output.
Under applied
(130,000)
10000
12
Over- or Underapplied Factory Overhead
Disposition
 Underapplied:
 Cost of Goods Sold
10,000
Factory overhead
10,000
 Overapplied:
 Factory overhead
10,000
Cost of Goods Sold
10,000
13
Disposition of Over- or Underapplied
Amount
DeWitt Products
Income Statement
For Year Ending December 31, 20Sales
Less: COGS
1,193,000
Underapplied FOH 8,500
COGS Adjusted
Gross Profit
$1,600,000
1,202,000
398.000
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Exercise No.01
On November 30, the work in process account of the Bee Dee Company showed:
WORK IN PROCESS ACCOUNT
Materials
Labour
Foh
20800
20160
15840
Finish goods
45600
Materials charged to the work still in process amounted $4560. Factory
overhead is a fixed percentage of direct labour cost.
Required: The individual amounts of factory overhead and direct labour
cost charged to closing balance of work in process.
Exercise No.02
The Millan Company employes 150 people
who work 8 hours per day and 5 days a week.
Normal capacity for the month is based on
assumption that the equivalent of 47 weeks of
work can be expected from an employee.
Required:
1. The number of direct labour hours
to be used in setting up factory
overhead rate based on normal
capacity.
2. The number of direct labour hours if
management and workers agree to
work for 10 hours, 4 day a week.
Exercise No.03
The Carrcroft Company estimates its factory overhead
for next period at $54,000. it is estimated that 36,000
units will be produced at a material cost of $45,000.
production will require 24,000 direct labour hours at an
estimated cost of $120,000. The machine will require
about 1600 hours.
Required:The predetermined factoryoverhead rate
based:
1. Material cost
2. Units of production
3. Machine Hours
4. Direct Labour Cost
5. Direct Labour Hours
Exercise No.04
Normal capacity of the Duro Company is set
at 90,000 hours. At this level of capacity the
fixed overhead is $36,000 and variable
overhead is $67,500. Actual results show
75,000 hours worked during the period.
Required:
1. Predetermined overhead rate based
on normal capacity.
2. The amount of factory overhead
applied to production.
Exercise No.05
Speed Co. assembles and sells electric mixers. All parts purchasedand
labour is paid on the basis of $32 per mixer assembled. The cost of parts
per mixer totals $40. As the company
handles only this one product, the unit cost basis for applying factory
overhead is used. Estimated factory overhead for the coming period
based on production of 30,000 mixer is as follows:
Indirect materials
$220,000
Indirect Labour$240,000
Light and heat
30,000
Depreciation
25,000
Miscellaneous
55,000
During the period 29,000 mixers were assembled and actual factory
overhead was $565,300.
Required:
1. Predetermine overhead rate.
2. The amount of factory over applied to production.
3. The amount of over or under applied factory overhead.
Exercise No.06
Normal capacity of a Company ‘s power plant is
estimated to be 4750,000 kilowatt hours per month.
At this level of activity, fixed overhead is estimated
to be $171,000 and variable overhead is $209,000.
During November the power plant produced
5000,000 kilowatt hours and actual overhead for the
month totaled $393,000.
Required:
1. Predetermined overhead rate based on normal
capacity.
2.
The amount of factory overhead applied to
production.
3.
Over or under applied factory overhead.
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