Factory Overhead Planned, Applied & Actual Chapter 9.
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Transcript of Factory Overhead Planned, Applied & Actual Chapter 9.
Factory OverheadPlanned, Applied & Actual
Chapter 9
This chapter…
Discusses the methods, procedures and bases available for applying factory overhead
Describes methods and procedures for classifying and accumulating actual factory overhead
Shows computations for over or underapplied factory overhead
Analyzes the total net variance
Factory Overhead
Factory overhead is generally defined as: Indirect materials Indirect labor All other factory expenses that cannot
conveniently be identified with specific jobs or products.
Factory Overhead
Also known as: Factory burden Manufacturing expense Manufacturing overhead Factory expense Indirect manufacturing cost
Factory Overhead possesses two characteristics:
Relationship with product Difficult to trace factory overheads to certain
jobs or products. A predetermined overhead rate permits an
equitable and logical allocation , therewith abandoning the use of actual cost for costing purposes.
Relationship with volume Fixed and variable expenses (Total & per unit)
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 to express it as a rate
Process Costing Can produce product cost without the use of
overhead rates Applying predetermined rates are
recommended as they speed up unit product cost calculations
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
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
Factors to be considered in Selection of Overhead rates
Activity level selection Normal capacity – long-term approach An overhead rate in which expenses and
production are based on average utilization of the physical plant over a time period long enough to level out the highs and lows that occur in every business venture
The rate does not change because of changes in actual production
Factors to be considered in Selection of Overhead rates Expected actual capacity – short-term
approach A rate in which overhead and production are
based on the expected actual output for the next production period.
The use of predetermined rate based on expected actual production is often due to the difficulty of judging current performance on a long range or normal capacity.
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
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 $1.50
Fixed overhead/ hr $0.80 $1.00
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 in
overhead rates. The fixed expense does not become a product
cost but is treated as a period cost.
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
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 fixed and 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
Factory Overhead – Actual
Accumulation of Actual Factory Overhead The basic purpose for accumulating factory overhead
is the gathering of information for purposes of control.
Control in turn requires : Reporting costs to the individual department heads
responsible for them And making comparisons with the amount budgeted
for the level of operations achieved.
Accounting for Actual Factory Overhead Steps involved in the accounting for factory
overhead transactions are: Analysis Journalizing Posting the factory overhead subsidiary
ledger and the factory overhead general ledger control account.
The principal source documents for recording overhead in the journal are:
Purchase vouchers Materials requisitions Labor time tickets General journal voucher.
The mechanics of applying Factory overhead Factory overhead is applied after direct
materials and direct labor costs is available
Work in process
Applied Factory Overhead
Applied Factory Overhead
Factory Overhead Control
The mechanics of applying Factory overhead A debit balance indicates that overhead has been
underapplied
A credit balance indicates that overhead has been over applied
These over- and under applied must be analyzed carefully; as they are the source of much information needed by management for controlling and judging the efficiency of operations and the use of available capacity during the particular period.
Disposition of Over or Under applied Factory Overhead If underapplied (Actual > Applied)
COGS
Factory Overhead
If overapplied (Actual < Applied)Factory Overhead
COGS
Assignment
The Carrcroft Company estimates its factory overhead for the 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 labor hours at an estimated cost of $120,000. The machines 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. What factors must be considered in selecting a particular basis?
Variance Analysis
Spending Variance-a variance due to budget or expense factors
Idle capacity Variance- a variance due to volume or activity levels
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
Spending Variance
The $ 750 is the difference between the actual factory overhead incurred and the budget allowance estimated for the capacity utilized i.e 190,000 direct labor hours.
The budget figures represents the budget for the level of the activity attained.
Favorable spending variance- when the actual overhead is less than the budgeted overhead.
Unfavorable spending variance- when the actual overhead is more than the budgeted overhead.
Idle Capacity Variance This occurs when the actual activity is below the normal
capacity.
This should not increase the factory overhead costs but should be recorded separately and be considered a 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 total budgeted fixed expense by the idle capacity percentage.
Disposition of Over-or Underapplied Factory Overhead At the end of the fiscal year , overhead
variances may be:
Treated as a period cost Or divided between inventories and cost of
goods sold.
Journal Entries
Cost of goods sold
Factory overhead
Or
Income Summary
Factory overhead