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FOH Rate/direct Labor Hour
FOH Rate/direct Labor Hour
- is the most simple method they use because units produced are readily available
- is appropriate when a company or department manufacturers only one product
Units of Production estimated factory overhead
Factory Overhead Rate= =FOH rate /unit of production
estimated units of production
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 department
5. Compute the factory overhead rate (similar to competition using blanket rate)
COSTCON PRELIMS REVIEWER by Kirsten Manalili 2
- in a departmentalized company, factory overhead should be budgeted for each department. Departmentalized overhead rates are for the producing
departments only.
- which include the production lines, are the cost-accumulation centers in which work is performed
Producing Departments
directly on the goods being produced.
- which include such activities as maintenance, personnel, employee services, and the provision of heat,
Service Departments power, and light, are necessary for the entire factory - including the producing departments - to remain in
operation
Typical Allocation Bases for Common Costs
Common Cost Typical Allocation Base
1. Supervision 1. No. of employees, payroll amnt of DLHrs
Labor-related common costs
2. Personnel services 2. Number of employees
3. Insurance on equipment 3. Value of equipment
4. Taxes on equipment 4. Value of equipment
Machine-related common costs
5. Equipment depreciation 5. Machine-hours, equipment value
6. Equipment maintenance 6. Number of machines, machine hours
7. Building rental 7. Space occupied
8. Building insurance 8. Space occupied
Space-related common costs 9. Heat & air-conditioning 9. Space occupied, volume occupied
10. Concession rental 10. Space occupied & desirability of location
11. Interior bldg. maintenance 11. Space occupied
12. Material Handling 12. Quantity or value or materials
Service-related common costs 13. Billing and accounting 13. Number of documents
14. Indirect materials 14. Value of direct materials
Methods of Allocating Service Department Cost to Producing Departments
- the most widely used method that ignores any service rendered by one service department to another. It
Direct Method
allocates each service department’s total cost directly to the producing departments
- sometimes called sequential method of allocation that recognizes services rendered by service
departments to other service departments and is more complicated because it requires a sequence of
allocation.
Step Method - the sequence typically starts with the department that renders service to the greatest number of other
service departments and ends with the department that renders service to the least number of other
departments
- once a service department’s costs are allocated, no subsequent service department costs are allocated to it
- sometimes called the reciprocal method wherein costs are allocated by explicitly including the mutual
Algebraic Method
services rendered among all departments
Capacity Production
- a capacity to produce at full speed without interruptions.
- it gives no allowance for human capacity to achieve the maximum nor due allowance for any
Theoretical, maximum or ideal capacity circumstances that might result to a stoppage of production within or not within the control of management
- the plant is assumed to function 24 hours a day, seven days a week, and 52 weeks a year without any
interruptions in order to yield the highest physical output possible
- a capacity of production that provides allowance for circumstances that might result to stoppage of
Practical capacity
production
- a capacity concept based on a short range outlook which is feasible only for firms whose products are
Expected actual capacity seasonal or where the market and style changes allow price adjustments according to competitive
conditions and customer demands
- a capacity of production taking into consideration the utilization of the plant facilities to meet
commercial demands served over a period long enough to level out the peaks and valleys which come with
Normal capacity
seasonal and cyclical variations
- is commonly used in the computations of overhead rate
Method of Accumulation of Factory Overhead Costs
- an account for each kind of overhead expense according to their nature is opened in the ledger and
Non-controlling account system
charges to such account are made upon incurrence of the expense
- an Overhead Control account is opened in the general ledger wherein the overhead incurred are charged
Controlling account system
and a subsidiary ledger is maintained to show in detail the nature and account of expense
- actual overhead costs are usually incurred daily and recorded periodically in the general and subsidiary
ledgers. Subsidiary ledgers permit a greater degree of control over factory overhead costs as related
Subsidiary Ledgers
accounts can be grouped together and the various expenses incurred by different departments can be
described in detail
- the estimated factory overhead cost are applied to production on an on-going basis as goods are
Computation of overhead chargeable to manufactured, according to the base used
individual cost sheets – (factory overhead - applied factory overhead can be computed by multiplying the actual factor incurred per cost sheet x
applied) predetermined overhead rate
Applied factory overhead =actual factor incurred per cost sheet × predertermined FOH
- the difference between the actual factory overhead as shown by factory overhead control account and the
Factory Overhead Variance
overhead charged the production as shown by the factory overhead applied account
Classification of Manufacturing Overhead Variance
Underapplied Overhead
- the difference between actual overhead and applied overhead when the actual is more than the applied
(Applied < Actual)
Overapplied Overhead
- the difference between actual overhead and applied overhead when the actual is less than they applied
(Applied > Actual)
Causes of Manufacturing Overhead Variance
- the variance due to expense factors
Actual factory overhead incurred xxx
Less: Budget allowed based on capacity used
Spending Variance
Fixed Factory Overhead xxx
Variable Factory Overhead xxx xxx
Spending Variance xxx
Idle capacity or volume variance - the variance due to difference in volume and activity factors
Budget allowed based on capacity used xxx
COSTCON PRELIMS REVIEWER by Kirsten Manalili 3
Materials xxx
Purchase of Material Accounts Payable xxx
- an entry is made on the stock card under the received section
- when a job is started, the materials needed for the job are issued based on the materials requisitions
prepared by the employees. a copy of the requisition is given to the storekeeper, which will serve as the
basis for the materials to be issued.
Issuance of Materials Work in Process xxx
Materials xxx
- an entry is made on the stock cart under the issued section and also on the coast sheet of materials
Factory Overhead Control xxx
Issuance of Indirect Materials Accounts Payable xxx
- an entry is made on the stock cart under the issued section and also on the overhead analysis sheet
Finished Goods
Controlling account used to record the flow of the cost of goods completed and transferred to the finished goods storeroom during the
period
1. Cost of beginning inventory 1. Cost of finished goods sold during the period at the same
2. Factory cost of job order completed at the same time time debiting cost of goods sold
crediting work and process
3. Cost of goods returned by the customer at the same time
crediting cost of goods sold