Accounting for

Factory
Overhead
CHAPTER 7 (PART 1)
Learning Objectives
Compute a factory overhead rate using
different bases
Apply the concept of actual factory
overhead and applied factory
overhead.
Identify and compute the different
methods of allocating budgeted service
department to producing departments
What is Factory
Overhead?
Expenditures inside the
factory that cannot be
charged to either direct
material or direct labor.
Examples of Factory
Overhead
Indirect materials
Indirect labor
Heat, Light, and Power for the factory
Rent of Factory building
Depreciation on factory building and
factory equipment
Maintenance costs of factory building
and factory equipment
3 categories of OH on the basis of
behavior in relation to production
Variable OH costs
Factory Overhead Costs that
vary directly in proportion to
the level of production level.
Total Variable Costs as
volume
Variable Cost per unit
(constant) as volume or
Fixed OH costs
Factory Overhead Costs that
remains constant within the
relevant range regardless of
the varying production level.
Total Fixed Costs (constant)
as volume or
Fixed Cost per unit as
Mixed Factory OH costs
Factory overhead costs that has
the characteristics of both fixed
and variable.
Mixed costs must ultimately be
separated into their fixed and
variable components.
How? Either using high-low
method or least squares method.
Remember this?

Overhead rat
How
do we
get
that?
Factors to be considered
in deriving the overhead
rate
Base to use
Activity level to use
Inclusion or exclusion of
fixed overhead
Use of single rate or
several rates
Base to Use
Should be related to the functions represented
by the overhead cost being applied.
If OH is LABOR-ORIENTED, use Direct Labor
hours / Direct labor cost as base.
If OH is INVESTMENT-ORIENTED, use Machine
hours as base.
If OH is MATERIAL-ORIENTED, use Material Cost
as base.
For simplicity, use physical output / number of
units produced.
Problem 1 (page 225)
The Denmark Company
estimates its factory overhead
for the next period at P425,000.
It is estimated that 500,000
units will be produced at a
materials cost of P1,000,000
and will require 250,000 direct
labor hours at an estimated
cost of P1,062,500. The
machines will run about
Compute for the predetermined
factory overhead rate.
Based on
Material Cost
Units of production
Machine hours
Direct Labor cost
Direct Labor hours
Based on Material Cost

OH rate =
=
= 0.425 or 42.5%
Based on Units of
production

OH rate =
=
= P 0.85 per unit
Based on Machine hours

OH rate =
=
= P 4.25 per
machine hour
Based on Direct Labor
Cost

OH rate =
=
= 0.4 or 40%
Based on Direct Labor
Hours

OH rate =
=
= P 1.7 per direct
labor hour
Problem 2 (page 225)
The Macro Company budgeted overhead
at P255,000 for the period for
Department A, on the basis of a
budgeted volume of 100,000 direct labor
hours. At the end of the period, the
Factory Overhead Control Account for
Department A had a balance of
P270,000; actual direct labor hours were
105,000.
1. Compute for the overhead application
rate
2. Compute for the applied factory
Solution
OH rate =
=
= P 2.55 per direct labor hour
Applied OH = 105,000 actual DL hours x P
2.55
= P 267,750
Actual P 270,000 vs Applied P267,750
= 2,250 under applied overhead
Problem 3
Marvin Companys estimated factory overhead for the
year was P456,120 and the actual overhead was
P470,800. Machine hours were used in determining the
OH application rate. There were 84,500 actual machines
and 81,450 estimated machine hours during the year.
1. Journal Entries to record applied OH
2. Journal Entries to record actual OH
3. closing entry of applied OH and actual OH
Assume the ff. amounts of applied factory overhead in
each account.
Cost of goods sold P 350,000
Finished goods, endP 100,000
Work in Process, end P 23,200
Allocate the over/under-applied factory overhead to these 3
accounts.
 Journal Entries
Work in Process 473,200
FO Applied ( 84,500 x 5.60) 473,200

FO Control 470,800
Various Accounts 470,800

FO Applied 473,200
Cost of Goods Sold 2,400
FO Control 470,800
FO rate = P 456,120/81,450 = P 5.60/Mach. Hr.
 Requirement B
Cost of goods sold 350,000/473,200 x
2,400 =1,775

Finished goods 100,000/473,200 x

2,400 = 507

Work in process 23,200/473,200 x

2,400 = 118
Problem 4
The Ellery Corp. uses job order costing system of accounting.
Shown below is a list of jobs completed during the month of March.

Job Material Direct

Cost Labor
123 P 300 P 600
124 1,080 940
125 720 1,400
126 4,200 5,120
Problem 4
FOH is applied on the basis of direct
labor costs and that the
predetermined overhead rate is
180%
1. Compute for the amount of
overhead to be added to the cost of
each job completed
2. Total Cost of each job completed
during the month
Solution
Problem 11
The Strawberry Corporation has the ff. information
relating to applied and actual factory overhead:
Factory Overhead Control P 30,500
Applied Factory Overhead 39,700
Applied Factory Overhead costs are in the following accounts:
Cost of Goods Sold P 32,000
Work in Process, end 3,500
Finished Goods, end 4,200
Required:
a. Allocate the over/under applied factory overhead to those
accounts distorted by using what turned out to be an
incorrect factory overhead rate.
b. Prepare the end-of-period entries.
Solution
Home work
~Solve Multiple Choice
Problems
# 9 # 10 # 11 # 12 # 15
~Advance Reading on
Allocation of service
Department costs