1.

1: Nature of factory overhead: Factory overhead cost is taken as indirect cost so its
required to be distributed among production department. as example Building maintenance,
property taxes, Raw material etc.
1.2 : Cost allocation of factory overhead: Factory Overhead allocation is the
apportionment of indirect costs to produced goods.
1.3: Apportionment of factory overhead: Service department overhead cost are
apportioning among production department. These happen when an overhead can not be
assign directly to one specific cost centre.
1.4: Absorption of factory overhead: The methods are given below.
1. Find out the cost allocation base
2. Find out estimate or budgeted factory overhead.
3. Calculate the pre-determine overhead rate
4. Method of pre-determine overhead rate
5. overhead application.
6. problems of overhead application.
1.5 Cost Allocation Based with Example:

Cost allocation base may be direct labor hours, direct labor cost, machine hours and units of
product

1.6 Calculation of Pre-determined Overhead Rate:

These rate may be calculated by the following formula:

Rate= Budgeted or Estimated factory overhead / Cost allocation rate

1.7 Methods of Predetermined Overhead Rate:

As cost allocation base is different types. There are several methods of finding out
predetermine overhead rate. The methods are given below:

A) Units of product method

Rate= (Budgeted manufacturing overhead cost / Unit produced) rate per unit

B) Percentage of direct material cost method:

Rate= (Budgeted manufacturing overhead cost / Direct material cost) * 100

C) Percentage of direct material cost method:

Rate= (Budgeted manufacturing overhead cost / Direct labor cost) * 100

D) Direct labor hour method:

Rate= (Budgeted manufacturing overhead cost / Budgeted labor hours) rate per labor hour

E) Machinor rate method:

Rate= (Budgeted manufacturing overhead cost / Budgeted machine hours) rate per machine
hour

1.8 Applied Overhead Calculation:

Applied factory overhead= Pre-determined overhead rate * cost allocation base.

1.9 Problem of under applied or over applied overhead:

There are may be two problems as follow:

A) Under Applied Factory Overhead: When actual factory overhead is greater then applied
factory overhead, difference will be taken as under applied factory overhead. Example: Let
us take actual factory overhead $10000 and applied factory overhead $8000. What will be
the difference between?

Answer: the difference ($10000-$8000)= $2000.

Under applied overhead account will be the loss of the business. So, it will have debit
balance.

B) Over Applied Factory Overhead: When actual factory overhead is smaller then applied
factory overhead, difference will be taken as over applied factory overhead. Example: Let us
take actual factory overhead $10000 and applied factory overhead $13000. What will be the
difference between?

Answer: the difference ($13000-$10000)= $3000.

Over applied overhead account will be the gain of the business. So, it will have credit
balance.
1.10 Adjustment of under applied or over applied overhead:

The under applied or over applied account can be adjusted in that way:

 It can be transferred to cost of good soul account

 It can be allocated among good soul, stock of finished goods, stock of working progress
according to units or value as per question.

 It can be directly transferred to income statement.

 It may be deferred for the next year.

2.1 Nature of job order costing:

Job order costing is applied in a situation where the product at the same place from input to
output. There are three elements in job order costing:- Material, Labor, Factory Overhead.

2.2 Examples where job order costing may be applied:

There are some examples where job order costing may be applied: Furniture making
business, Pharmaceutical industry, Garment factory, House construction, Bridge
construction, Aircraft assemble or accounting farm for audit, all shorts of studio,

2.3: Three systems in job order costing:

(a). Actual Costing.
(b). Normal costing system.
(c). Extended normal costing system.
A job order costing system is most suitable where the products manufactured differ in
materials and conversion requirements. Under a job order cost system, the three basic
elements of cost—direct materials, direct labor, and factory overhead—are accumulated
according to assigned job numbers. 
2.4: Actual Costing:
Under this system actual cost of the job= Actual direct material cost+ Actual direct labor
cost+ Actual factory overhead cost.

2.5: Normal Costing system:

Cost of the job = Actual direct material cost+ Actual direct labor cost+ Applied factory
overhead cost.

2.6 Nature of extended normal costing system:

Cost of the job= Direct material cost as applied+Direct labor cost as applied+Applied factory
overhead

Where,

Applied direct cost (material,labor)= Actual quality of cost allocation

base(hours/units)*Budgeted direct cost rate.

2.7 Determination of target price:

This may be calculated by following formula:

A)Selling price= Cost of a job+Actual profit on cost

B)Target price/Estimated Selling Price= Cost of the job+Markup/Markdown

2.8 Markup and Markdown:

Markup: Percentage of profit into cost of the job.

Markdown: Percentage of loss into cost of the job.