5/19/2023

PAMANTASAN NG LUNGSOD
NG VALENZUELA
COLLEGE OF BUSINESS ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY
(2ND SEMESTER)

ACCOUNTING FOR
FACTORY OVERHEAD
PART 1

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FACTORY OVERHEAD (FOH)

• All costs incurred in the factory that are not direct materials or direct
labor are generally termed as factory overhead.
• It refers to the cost pool used to accumulate all indirect manufacturing
costs.
• Example: Indirect labor; indirect materials; heat, light, and power for the
factory, rent on factory building

THREE (3) CATEGORIES OF FACTORY

OVERHEAD

1. Variable factory overhead costs

2. Fixed factory overhead costs
3. Mixed factory overhead costs

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VARIABLE FOH COSTS

• It varies in direct proportion to the level of production, within the relevant range.

Variable cost per unit = CONSTANT as production either increases or decreases

Total variable cost = VARIES in DIRECT PROPORTION to production

FIXED FOH COSTS

• These remains constant within the relevant range regardless of the varying levels of
production.

Fixed cost per unit = VARIES inversely with the production as production either
increases or decreases

Total fixed cost = CONSTANT as production either increases or decreases

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MIXED FOH COSTS

• These are neither wholly fixed nor variable in nature but have characteristics of both.
• Mixed FOH costs must ultimately be separated into their fixed and variable components
for purposes of planning and control.

FACTORY TO BE CONSIDERED IN THE

COMPUTATION OF OVERHEAD RATE

1. BASE TO BE USED
A. Physical output
B. Direct materials cost
C. Direct labor cost
D. Direct labor hours
E. Machine hours

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FACTORY TO BE CONSIDERED IN THE

COMPUTATION OF OVERHEAD RATE

II. ACTIVITY LEVEL TO USE

A. Normal capacity
B. Expected actual capacity

III. INCLUSION OR EXCLUSION OF FIXED FACTORY OVERHEAD

A. Absorption costing – method used for cost accounting
B. Direct costing – method used for internal reporting

FACTORY TO BE CONSIDERED IN THE

COMPUTATION OF OVERHEAD RATE

IV. USE OF SINGLE RATE OR SEVERAL RATES

A. Plant-wide or blanket rate – one rate for all producing departments
B. Departmentalized rate – one rate for each producing departments

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BASE TO BE USED
Direct Labor Hours

 Most commonly used base or denominator in the computation of the predetermined

factory overhead rate.
 Best fit if there is direct relationship between FOH and DLHrs.

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BASE TO BE USED
Direct Labor Cost

 Best fit if there is direct relationship between labor cost and FOH

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BASE TO BE USED
Machine Hours

 Best fit if there is direct relationship between FOH cost and machine hours.

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BASE TO BE USED
Direct material cost

 This method is appropriate if it can be inferred that factory overhead costs are directly related to
direct material cost as in cases where direct materials are a very large part of total cost.

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BASE TO BE USED
Units of Production

 This is most simple method to use because units produced are readily available.
 Best fit for company having only one (1) product.

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SAMPLE PROBLEM
The RDL Company estimates FOH at Php450,000 for the next fiscal year. It is estimated that 90,000
units will be produced at a material cost of Php600,000. Conversion will require an estimated 100,000
direct labor hours at a cost of Php3.00 per hour, with 45,000 machine hours.
A. Material Cost

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SAMPLE PROBLEM
The RDL Company estimates FOH at Php450,000 for the next fiscal year. It is estimated that 90,000
units will be produced at a material cost of Php600,000. Conversion will require an estimated 100,000
direct labor hours at a cost of Php3.00 per hour, with 45,000 machine hours.
B. Units of production

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SAMPLE PROBLEM
The RDL Company estimates FOH at Php450,000 for the next fiscal year. It is estimated that 90,000
units will be produced at a material cost of Php600,000. Conversion will require an estimated 100,000
direct labor hours at a cost of Php3.00 per hour, with 45,000 machine hours.
C. Machine hours

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SAMPLE PROBLEM
The RDL Company estimates FOH at Php450,000 for the next fiscal year. It is estimated that 90,000
units will be produced at a material cost of Php600,000. Conversion will require an estimated 100,000
direct labor hours at a cost of Php3.00 per hour, with 45,000 machine hours.
D. Direct labor hours

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SAMPLE PROBLEM
The RDL Company estimates FOH at Php450,000 for the next fiscal year. It is estimated that 90,000
units will be produced at a material cost of Php600,000. Conversion will require an estimated 100,000
direct labor hours at a cost of Php3.00 per hour, with 45,000 machine hours.
E. Direct labor hours

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TYPICAL ALLOCATION BASES FOR

COMMON COSTS

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METHODS OF ALLOCATING SERVICE

DEPARTMENT COST TO PRODUCING
DEPARTMENTS
1. Direct Method
 It ignores any service rendered by one service department to another, it allocates each service
department’s total cost directly to the producing departments.

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METHODS OF ALLOCATING SERVICE

DEPARTMENT COST TO PRODUCING
DEPARTMENTS
II. Step Method / Sequential Method
 This method recognizes services rendered by service departments to other service departments to
other service departments.

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METHODS OF ALLOCATING SERVICE

DEPARTMENT COST TO PRODUCING
DEPARTMENTS
III. Algebraic Method / Reciprocal Method
 This method allocates costs by explicitly including the mutual services rendered among all the
departments

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SAMPLE PROBLEM
The Sleepy Pringles Factory is divided into four (4) departments – producing departments; Molding and
Decorating, serviced by the Buildings and Grounds and the Factory administration departments. Buildings
and Grounds cost will be allocated using square feet (floor area) and Factory Administration cost will be
allocated using direct labor hours. In computing predetermined overhead rates, machine hours are used
as the base in Molding and direct labor hours as the base in Decorating.

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CAPACITY PRODUCTION

A. Theoretical, maximum or ideal capacity

 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
circumstances that might result to a stoppage of production within or not within the control of
management.
 24/7 working

B. Practical Capacity
 Provides allowance for circumstances that might result to stoppage of production.

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CAPACITY PRODUCTION

C. Expected Actual Capacity

 A capacity concept based on a short range outlook which is feasible only for firms whole products are
seasonal.

B. Normal Capacity
 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.
 Commonly used in the computations of overhead rates.

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METHOD OF ACCUMULATION OF FACTORY

OVERHEAD COSTS
A. NON-CONTROLLING ACCOUNT SYSTEM
 An account for each kind of overhead expense according to their nature is opened in the ledger and
charges to such account are made upon incurrent of the expense.

B. CONTROLLING ACCOUNT SYSTEM

 An OH control account is opened in the general ledger wherein the OH incurred are charged and a
subsidiary ledger is maintained to show in details the nature and account of the expense.

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SOURCE:

Cost Accounting and Control 2019 Edition

by Normal D. De Leon
Ellery D. De Leon
Guillermo M. De Leon Jr.

THANK YOUU! 

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