Chapter 7 Summary

Accounting for Factory Overhead

I. Factory overhead costs are divided into three categories on the basis of their behavior in
relation to production.
1. Variable factory overhead costs
2. Fixed factory overhead cots
3. Mixed factory overhead costs
II. Budgeting factory overhead costs
III. Factors to be considered in the computation of overhead rate
1. Base to be used
2. Activity level to use
3. Inclusion or exclusion of fixed factory overhead
4. Use of single rate or several rates
IV. Steps in computation of departmentalized overhead rate
1. Divide the company into segments, called departments, cost centers, to which expenses
are charged.
2. Estimate the factory overhead for each department (direct departmental charges +
indirect departmental charges).
3. Select and estimate the base to be used by each department.
4. Allocate the service department costs to the producing departments.
5. Compute the factory overhead rate (similar to computation using blanket rate).
V. Typical allocation bases for common costs
1. Labor-related common costs
2. Machine-related common costs
3. Space-related common costs
4. Service-related common costs
VI. Methods of allocating service department cost to producing departments
1. Direct method
2. Step method
3. Algebraic method
VII. Capacity Production
a. Theoretical, maximum or ideal capacity
b. Practical capacity
c. Expected actual capacity
d. Normal capacity
VIII. Method of accumulation of factory overhead costs
1. Non-controlling account system
2. Controlling account system
IX. Activity based costing
X. Five basic steps in applying ABC
1. Assemble similar actions into activity centers
2. Classify costs by activity center and by type of expense
3. Select cost drivers
4. Compute a cost function to associate costs and cost-drivers with resource use.
5. Assign cost to the cost objective