ch 9 factory overhead - 2a
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This chapter
Discusses the methods, procedures andbases available for applying factory overhead
Describes methods and procedures for
classifying and accumulating actual factoryoverhead
Shows computations for over or underappliedfactory overhead
Analyzes the total net variance
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Factory Overhead
Factory overhead is generally defined as:
Indirect materials
Indirect labor
All other factory expenses that cannotconveniently be identified with specific jobs orproducts.
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Factory Overhead
Also known as:
Factory burden
Manufacturing expense
Manufacturing overhead
Factory expense
Indirect manufacturing cost
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Factory Overhead possesses twocharacteristics:
Relationship with product
Difficult to trace factory overheads to certainjobs or products.
A predetermined overhead rate permits anequitable and logical allocation , therewithabandoning the use of actual cost for costingpurposes.
Relationship with volume
Fixed and variable expenses (Total & per unit)
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Predetermined Factory Overhead Rate
Job Order Costing
Total overhead cost are estimated
Total estimated overhead cost are related to
direct labor dollars, direct labor hours, etc toexpress it as a rate
Process Costing
Can produce product cost without the use of
overhead ratesApplying predetermined rates are
recommended as they speed up unit productcost calculations
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Factors to be considered in Selection
of Overhead rates
Base to be used
Physical output
Estimated factory overhead = factory overhead/unit Estimated units of production
Direct materials cost
Estimated factory overhead *100 = % of overhead/direct material cost
Estimated material cost
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Factors to be considered in
Selection of Overhead rates Direct labor cost
Estimated factory overhead *100 = % of overhead/direct labor cost
Estimated Direct labor cost
Direct labor costs = Direct labor hours* hourly wage rate
Direct labor hours Estimated factory overhead = Rate per direct labor hour
Estimated Direct labor hours
Machine hours Estimated factory overhead = Rate per machine hour
Estimated machine hours
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Factors to be considered in Selection
of Overhead rates
Activity level selection
Normal capacity long-term approach
An overhead rate in which expenses andproduction are based on average utilization ofthe physical plant over a time period longenough to level out the highs and lows that
occur in every business venture The rate does not change because of changes
in actual production
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Factors to be considered in Selection
of Overhead rates
Expected actual capacity short-termapproach
A rate in which overhead and production are
based on the expected actual output for thenext production period.
The use of predetermined rate based onexpected actual production is often due to thedifficulty of judging current performance on along range or normal capacity.
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Example
Normal capacity= 150,000 DLH
Actual capacity= 116,000 hours
Expected actual capacity= 120,000DLH
Fixed expense= $120,000
Variable expense= $0.50/ DLH
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Solution
Fixed expense 120,000 120,000
Variable expense:
150,000 hrs*0.50 75,000
120,000 hrs*0.50 60,000
______ ______
Total estimated overhead 195,000 180,000
Estimated DLHs 150,000 120,000
Factory overhead/hr $1.30 $1.50Fixed overhead/ hr $0.80 $1.00
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Factors to be considered in Selection
of Overhead rates
Including or excluding of fixed overhead
Absorption costing
Fixed and variable expenses both are included
in overhead rates.
Direct costing
Only variable overhead is included inoverhead rates.
The fixed expense does not become a productcost but is treated as a period cost.
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Calculation of Factory Overhead Rate
Identifying the base to be used
Estimating the Activity level & Expenses
Classifying Expenses as Fixed or Variable
Establishing the Factory Overhead Rate
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Calculation of Factory Overhead Rate
Estimated factory overhead = Rate per direct labor hour
Estimated Direct labor hours
Factory overhead can be broken down into its fixedand variable components: Estimated fixed factory overhead = fixed portion of factory overhead rate
Estimated Direct labor hours
Estimated variable factory overhead = variable portion of factory overhead rate
Estimated Direct labor hours
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Factory OverheadActual
Accumulation of Actual Factory Overhead
The basic purpose for accumulating factory overheadis the gathering of information for purposes of control.
Control in turn requires :
Reporting costs to the individual department headsresponsible for them
And making comparisons with the amount budgetedfor the level of operations achieved.
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Accounting for Actual Factory
Overhead
Steps involved in the accounting for factoryoverhead transactions are:
Analysis
Journalizing Posting the factory overhead subsidiary
ledger and the factory overhead general
ledger control account.
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The principal source documents for recordingoverhead in the journal are:
Purchase vouchers
Materials requisitions Labor time tickets
General journal voucher.
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The mechanics of applying Factory
overhead
Factory overhead is applied after directmaterials and direct labor costs is available
Work in processApplied Factory Overhead
Applied Factory OverheadFactory Overhead Control
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The mechanics of applying Factory
overhead
A debit balance indicates that overhead has beenunderapplied
A credit balance indicates that overhead has beenover applied
These over- and under applied must be analyzed
carefully; as they are the source of much informationneeded by management for controlling and judgingthe efficiency of operations and the use of availablecapacity during the particular period.
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Disposition of Over or Under applied
Factory Overhead
If underapplied (Actual > Applied)
COGS
Factory Overhead
If overapplied (Actual < Applied)
Factory Overhead
COGS
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Assignment
The Carrcroft Company estimates its factory overhead for thenext period at $54,000. it is estimated that 36,000 units will beproduced at a material cost of $45,000. Production will require24,000 direct labor hours at an estimated cost of $120,000. Themachines will run about 1,600 hours.
Required: the predetermined factory overhead rate based on : Material cost
Units of production
Machine hours
Direct labor cost
direct labor hours.
Name five bases used for applying factory overhead. Whatfactors must be considered in selecting a particular basis?
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Variance Analysis
Spending Variance-a variance due to budgetor expense factors
Idle capacity Variance- a variance due to
volume or activity levels
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Actual factory overhead $292,000
Spending variance 750 unfavorable
Budget allowance-based on capacity utilized
Fixed factory overheads budgeted (in total)$125,000
Variable factory overheads
(190,000 actual hours* 0.875) 166,250 $291,250
Idle Capacity Variance 6,250 unfavorable
Applied Factory overhead(190,000 hrs*1.50) $285,000
Factory overhead underapplied _______
(292,000-$285,000) $7,000
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Spending Variance
The $ 750 is the difference between the actualfactory overhead incurred and the budget allowanceestimated for the capacity utilized i.e 190,000 directlabor hours.
The budget figures represents the budget for thelevel of the activity attained.
Favorable spending variance- when the actualoverhead is less than the budgeted overhead.
Unfavorable spending variance- when the actualoverhead is more than the budgeted overhead.
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Idle Capacity Variance
This occurs when the actual activity is below thenormal capacity.
This should not increase the factory overhead costs
but should be recorded separately and be considereda part of total manufacturing costs.
The idle capacity can be computed by multiplying the
idle hours by the fixed rate per unit.
It can also be computed by multiplying the totalbudgeted fixed expense by the idle capacity
percentage.
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Disposition of Over-or
Underapplied Factory Overhead
At the end of the fiscal year , overheadvariances may be:
Treated as a period cost Or divided between inventories and cost of
goods sold.
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Journal Entries
Cost of goods sold
Factory overhead
Or
Income Summary
Factory overhead