Factory Overhead Practical Problems & Solutions

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Factory Overhead: Practical Problems and Solutions
Factory Overhead: Practical Problems

and Solutions
Written by True Tamplin, BSc, CEPF®
Reviewed by Subject Matter Experts
Updated on March 03, 2023
Fact Checked Why Trust Finance Strategists?
Table of Contents
Factory Overhead Application Methods
FOH Variances
High-Low Point Method
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Factory Overhead Application Methods
Problem 1
IQIZ estimated its factory overhead for the next period at $160,000. It is estimated that
40,000 units will be produced at a materials cost of $200,000.
Production will require 40,000 man-hours at an estimated wage cost of $80,000. The
machines will run for approximately 25,000 hours.
Required: Calculate the factory overhead rate that may be used in applying FOH to
production on each of the following bases:
• Materials cost
• Direct labor cost
• Direct labor hours
• Machine hours
• Units of production
• Prime cost
Solution
1. Material Cost Basis
Formula:
= (Estimated factory overhead / Estimated material cost) x 100
= ($160,000 / $200,000) x 100
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= 80%
2. Direct Labor Cost Basis
Formula:
= (Estimated FOH / Estimated DL cost) x 100
= ($160,000 / $80,000) x 100
= 200%
3. Direct Labor Hours Basis
Formula:
= (Estimated FOH / Estimated DL hours) x 100
= $160,000 / 40,000 hrs.)
= $4.00 per hour
4. Machine Hours Basis
Formula:
= Estimated FOH / Estimated machine hours
= $160,000 / 25,000 hrs.
= $6.40 per machine hour
5. Units of Production Cost
Formula:
= Estimated FOH / Estimated no. of units
= $160,000 / 40,000 hours
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= $4.00 per unit
6. Prime Cost Basis
Formula:
= Estimated FOH / Estimated prime cost
= ($160,000 / ($200,000 + 80,000)) x 100
= 89%
FOH Variances
Problem 2
The factory overhead for the King Manufacturing Company is estimated as follows:
• Fixed overhead = $15,000
• Variable overhead = $45,000
• Estimated direct labor hours = 20,000
Production for the month reached 75% of the budget. In addition, actual factory overhead
totaled $43,000.
Required: Calculate the following:
• Applied factory overhead (i.e., overapplied or underapplied)
• Spending and capacity variances
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Working
FOH Applied Rate
Formula:
= FOH applied for normal capacity / Normal capacity
= $60,000 (15,000 + 45,000) / 20,000 hrs.
= $3 per hour
Applied FOH for Actual Capacity or Capacity Attained
Formula:
= Actual capacity x FOH hrs. x $3
= (20,000 x 75%) x $3
= 15000 hrs. x $3
= $45,000
Budgeted Allowance
Formula:
= Fixed cost + Variable cost for actual capacity
= $15,000 + 33,750*
= $48,750
* Variable Cost for Actual Capacity
Formula:
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= Actual capacity x Variable cost rate
= 15,000 x $2.25*
= $33,750
* Variable Cost Rate
Formula:
= Variable cost for normal volume / Normal volume
= $45,000 / 20,000 hrs.
=$2.25 per hour
Solution
1. Overapplied or underapplied FOH
2. Variances
Spending variance
Capacity variance
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Variance check
High-Low Point Method
Problem 3
The burden rate of John & Co. is $2.00 per hour. The budgeted overhead for 3,000 hours
per month is $8,000 and at 7,000 hours is $12,000. Actual factory overhead for the month
was $9,000 and actual volume was 5,000 hours.
Required: Calculate the following:
• Variable overhead in burden rate
• Budgeted fixed overhead
• Normal volume
• Applied overhead
• Over- or under-absorbed overhead
• Idle capacity variance
• Spending variance
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Solution
Activity Level Budgeted FOH
(hrs.) ($)
7,000 12,000
3,000 8,000
4,000 4,000
1. Variable Cost Rate/V.C. in burden rate
Formula:
= Difference in burden FOH / Difference in activity level
= $4,000 / 4,000 hrs.
= $1 per hour
2. Budgeted Fixed Overhead
Budgeted FOH for 7,000 hrs. $12,000
Less VC for 7,000 hrs. (7,000 x 1) $7,000
Fixed Cost $5,000
OR
Budgeted FOH for 3,000 hours $8,000
Less VC for 3,000 hours (3,000 x 1) $3,000
Fixed Cost $5,000
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3. Normal Volume/Standard Activity Level
Formula:
= Fixed FOH Cost / Fixed FOH Cost Rate
= $5,000 / $1
= 5,000 hrs.
4. Applied Factory Overheads
Formula:
= Actual capacity x FOH applied rate
= 5,000 x 2
= $10,000
5. Over- or Under-absorbed FOH
Applied FOH for Capacity Attained $10,000
Less Actual FOH $9,000
Overapplied FOH $1,000
6. Capacity Variance
FOH Applied for Capacity Attained $10,000
Less Budgeted Allowance $10,000
7. Spending Variance
Actual FOH $9,000
Less Budgeted Allowance $10,000
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1,000 (Favourable)
Variance check
Calculations
Fixed FOH Rate
Applied Burden Rate $2.00
Less Variable Rate $1.00
Fixed Burden Rate $1.00
Budgeted allowance:
= Fixed cost + Variable cost for capacity attained
= 5,000 + (5,000 x 1)
= 5,000 + 5,000
= $10,000
Factory Overhead: Practical Problems and Solutions FAQs
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Why does the high-low method work best with variable overhead?
High low works best with voh because it is easy to precisely determine the difference in activity
level between two months (i.E., Number of hours worked).
When do you use a predetermined overhead rate instead of allocation bases to

assign factory overhead costs to production?
Using a predetermined overhead rate is better when assigning factory overheads to production
in an environment where the activity levels for various products remains relatively constant even
in periods of high and low sales.
What does it mean when a company uses a variable costing system?
A variable costing system allows companies to understand costs based on how much they are
affected by sales volume. In a variable costing system, overhead costs are typically charged to
expense in the period when they are incurred rather than being spread out across all units
produced over a specific time frame.
How is the activity level used when assigning factory overhead?
Activity level is a predefined characteristic that can be applied in two different ways: an activity
index or a level of capacity. These are used when allocating fixed overhead to multiple products
based on the production volume associated with each unit. For example, an activity index can
be calculated by dividing costs by units produced, while capacity is defined as hours worked
over some predetermined time period.
What are examples of an allocation base?
Examples of allocation bases include machine hours and direct labor hours.
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A B O U T TH E AU TH O R
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and

founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy

Financial Ratios Guide, a member of the Society for Advancing Business
Editing and Writing, contributes to his financial education site, Finance
Strategists, and has spoken to various financial communities such as the CFA
Institute, as well as university students like his Alma mater, Biola University,
where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on
Amazon, or check out his speaker profile on the CFA Institute website.
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