Accounting for Manufacturing Overheads

Illustrative Problem
The round table company estimates factory overhead at 450,000 for the next fiscal year. It is estimated that 90,000 units will be produced at a material cost of 600,000. Conversion will require an estimated 100,000 direct labor hours at a cost of 3.00 per hour, with 45,000 machine hours

Illustrative Problem (cont.)

Required: compute the predetermined factory rate based on; Material cost Units of production Machine hours Direct labor cost Direct labor hours

Material Cost
FOH rate = Estimated factory overhead Estimated direct material cost = 450,000 / 600,000 = 75% of direct material cost

Units of Production
FOH rate = Estimated factory overhead Estimated units of production = 450,000 / 90,000 DLHs = 5.00/unit

Machine Hours
FOH rate = Estimated factory overhead Estimated machine hours = 450,000 / 45,000 machine hours = 10.00/machine hour

Direct Labor Cost

FOH rate = Estimated factory overhead Estimated direct labor cost = 450,000 / 300,000 = 150% of direct labor cost

Direct Labor Hours

FOH rate = Estimated factory overhead Estimated direct labor hrs = 450,000 / 100,000 direct labor hours = 4.50 /direct labor hours

Activity
The round table company estimates factory overhead at 550,000 for the next fiscal year. It is estimated that 85,000 units will be produced at a material cost of 900,000. Conversion will require an estimated 150,000 direct labor hours at a cost of 5.00 per hour, with 55,000 machine hours

Illustrative Problem
Kappa Gamma Companys factory is divided into four 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 labors

Illustrative Problem (Cont.)

In computing predetermined overhead rates, machine hours are used as the base in Molding and direct labor hours as the base in decorating.
MOLDING FACTORY ADM

DECORATING

BLDG & GROUNDS

Budgeted FO 120,000 Machine hours 4,000

400,000

600,000

80,000

Direct labor hours 200,000

100,000

100,000
60,000 2,000

Required: Allocate the cost of the service

Direct Method
MOLDING FACTORY ADM DECORATING BLDG & GROUNDS

Budgeted FO 120,000 Allocated FO B&G FA (120,000) TOTAL FO

400,000

600,000

80,000

50,000 80,000

30,000 40,000 530,000 670,000

(80,000)

Base
FOH rate

100,000
5.3MHr

100,000
6.70/DLHr

Step Method
MOLDING FACTORY ADM DECORATING BLDG & GROUNDS

Budgeted FO 120,000 Allocated FO B&G 1,951 FA (121,951) TOTAL FO Base FOH rate

400,000

600,000

80,000

48,781 81,301

29,268 40,650 530,082 669,918

(80,000)

100,000 5.3/MHr

100,000 6.70/DLHr

Algebraic Method
Additional Information for the illustrative problem: B&G 50% 30% 20% FA 40% 50% 10%

Molding Decorating B&G FA

Algebraic Method
Algebraic Equation
B & G = 80,000 + 10% (FA) FA =120,000 + 20% (BG)

Algebraic Method
Substitution: B & G = 80,000 + 10% (FA) = 80,000 + 10% (120,000 + .20BG) = 80,000 + 12,000 + .02BG .98BG = 92,000

BG = 92,000/.98 =93,878

Algebraic Method
Substitution: FA = 120,000 + 20% (BG) = 120,000 + 20% (93,878) = 138,776 .

Algebraic Method
MOLDING FACTORY ADM DECORATING BLDG & GROUNDS

Budgeted FO 120,000 Allocated FO B&G 18,776 FA (138,776) TOTAL FO

400,000

600,000

80,000

46,939 55,510

28,163 69,388 502,449 697,551

(93,878) 13,878