FOH - factory overhead PDF

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SSC - R

Cost Accounting and ControlAccounting for Manufacturing Overhead

Accounting for Factory/Manufacturing Over Overhead head Learning Objectives Upon completion of the topic, the student should be able to:  Compute factory overhead rates using different bases.  Apply the concept of actual factory overhead and applied factory overhead.  Identify and compute the different method of allocating budgeted service department to producing department.  Identify and compute the different method of allocating budgeted service department to producing department. All cost incurred in the factory that are not direct material or direct labor are generally termed as Factory overhead. Factory overhead refers to the cost pool used to accumulate all indirect manufacturing costs. Examples of factory overhead include the following: a. Indirect materials and indirect labor b. Heat, light, and power for the factory c. Rent on factory building d. Depreciation on factory building and factory equipment e. Maintenance of factory building and factory equipment f. Factory supplies g. Wages of supervisors, factory maintenance personnel, raw materials handlers/stockman, factory security men. h. Factory overtime, shift and night premium. i. Employers share of SSS, PhilHealth, and Pag-ibig. Predetermined Overhead Rate In a normal cost system of accumulating product costs, the overhead is charged to Work In Process using the predetermined overhead rate. A predetermined overhead rate is a budgeted and constant charge per unit of activity. The activity chosen is called the Overhead Allocation Base or Cost Driver. Formula: Predetermined Overhead Rate=

Budgeted factory overhead Budgeted production activity

Factor to be considered in the computation of overhead rates (commonly used bases): 1. Base to be Used a. Physical output d. Direct Labor Hours b. Direct Material Cost e. Machine Hours c. Direct Labor Cost 2. Activity level to use a. Normal Capacity

b. Expected actual Capacity

3. Inclusion or exclusion Of Fixed Factory Overhead a. Absorption Costing

b. Variable Costing

4. Use of single rate or Several rates a. Plant wide or Blanket rate – one rate for all producing department

b. Departmentalization – one rate for each producing department.

Base to be used The based to be used be related to function represented by the overhead cost being applied. If the factory overhead is labor – oriented, the most appropriate base to use is direct labor hours or direct labor cost. If the factory is investment – oriented, related to operation of machinery, then the most appropriate base will be machine hours. On the other hand, if factory overhead is material – oriented, then material cost might be considered as the most appropriate base. The simplest of all bases is physical output or units of production. Illustration 01: The Salazar Round Table Company estimates factory overhead at P450,000 for the next fiscal year. It is estimated that 90,000 units will be produced at a material cost of P600,000. Conversion will require an estimated 100,000 direct labor hours at a cost of P3 per hour, with 45,000 machine hours. Required: Compute the predetermined factory rate based on: Guide: a. Material Cost (450,000/600,000) *100 75% b. Units of Production (450,000/90,000) 5.00/unit c. Machine Hours (450,000/45,000) 10.00/machine hour d. Direct Labor Cost (450,000/300,000) *100 150%/direct labor cost

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Cost Accounting and ControlAccounting for Manufacturing Overhead

e. Direct Labor Hours (450,000/100,000) 4.50/direct labor hour Note: The rate computed above is known as the Plant-wide or blanket rate. All department in the company will use the same application rate for factory overhead and also the same base. Illustration 02: Assume the following budgeted data for the year: Manufacturing overhead costs P96,000 Number of goods of production 24,000 units Direct material costs P480,000 Machines hours 12,000 hours Direct labor hours 40,000 hours Direct labor costs P200,000 Required: Compute the predetermined overhead rate based on: Guide: a. Material Cost (96,000/480,000) *100 b. Units of Production (96,000/24,000) c. Machine Hours (96,000/12,000) d. Direct Labor Cost (96,000/200,000) *100 e. Direct Labor Hours (96,000/40,000)

20% of direct material cost 4.00 per unit 8.00 per machine hours 48% of direct labor cost 2.40 per direct labor hour

Recording Factory Overhead Applied (FOH – Applied) Work In Process Pxx Factory Overhead – Applied Pxx Departmental Rate and Plant-wide Rate Manufacturing companies normally haw two or more production departments that convert the raw materials into finished product. The production technology may differ in each department so that one department maybe highly automated using machines in its operation while the other utilizes mostly manpower. Because of this, the use of departmental rates (one overhead rate per department) is recommended to allow each department to select the most appropriate measure of activity relative to its operation. This method provides more accurate product costing considering that manufacturing overhead incurred includes various overhead costs that vary greatly in their relationship to the production process. If only one overhead rate is chosen by the company for the allocation of manufacturing overhead to different jobs, that overhead rate is called plant wide rate. Illustration 03: SF Manufacturing Company has two producing department, Assemble and Finishing Department. Assembly Department has significant amount of labor-related overhead and it uses direct labor hours as a cost driver while Finishing Department has significant amount of machine-related overhead and it uses machines hours as the cost driver. The following data are available for SF Manufacturing Company for the year just ended: Budgeted Data Assembly Finishing Manufacturing overhead P1,890,000 P1,260,000 Direct labor hours 52,000 20,000 Machine hours 15,000 80,000 Actual date: DM used per unit P120 P50 Direct labor cost per unit [email protected]/hr [email protected]/hr Machine time used per unit 30 min. 3 hrs. Actual production: 25,000 units Required: Determine the total cost of producing the 25,000 units assuming (a) plant wide rate based on direct labor hours and (b) department rate. Guide: Plant wide rate based on direct labor hours. Cost Elements Assembly Finishing Total Direct Materials 3,000,000 1,250,000 4,250,000 (25000 *120) (25,000*50) Direct Labor 1,875,000 703,125 2,578,125 (25,000*2*37.50) (25,000*.75*37.50) Factory Overhead 2,187,500 820,312.5 3,007,812 (25,000*2*43.75) (25,000*.75*43.75) Total 7,062,500 2,773,437.5 9,835,937

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Cost Accounting and ControlAccounting for Manufacturing Overhead

Guide: Departmental rates: Assemble uses DLH while Finishing uses MH Cost Elements Assembly Finishing Direct Materials 3,000,000 1,250,000 Direct Labor 1,875,000 703,125 Factory Overhead 1,817,307 1,181,250 (25,000*2*36.346) (25,000*3*15.75) Total 6,692,307 3,134,375

Total 4,1250,000 2,578,125 2,998,557 9,826,682

Method of allocating Service Department C Cost ost to Producing Departments 1. Direct Method (the most widely used method) this method ignores any service rendered by one service department to another. It allocates each service department’s total cost directly to producing departments. 2. Step Method (sequential method of allocation) this method recognizes services rendered by service departments to other service departments and is more complicated because it requires a sequence of allocation. 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 the service department’s costs are allocated, no subsequent service department costs are allocated to it. 3. Algerbraic Method (Reciprocal method) this method allocates costs by explicitly including the mutual service rendered among all departments. Illustration 04: MM Manufacturing Company has four (4) departments. Two producing departments, Assembly and Finishing, and two service departments, Cafeteria and Maintenance. The overhead cost of Cafeteria is allocated based on number of employees while the overhead cost of Maintenance is allocated based on estimated factory overhead. Assembly department used direct labor hours and Finishing department used machine hours as bases in computing for predetermined overhead rates.

Estimated Dept. OH Estimated DLH Estimated MH Number of employee

Service Department Cafeteria Maintenance P250,000 P150,000

100

20

Pr Producing oducing Department Assemble Finishing P100,000 P60,000 200,000 100,000 150,000 250,000 1,500 1,000

Required: Allocate service departments cost using direct method, step method starting with cafeteria and algebraic method. Guide: Direct Method Est. Dept. OH costs Cafeteria: Assembly: Finishing: Maintenance Assemble: Finishing: Total est. Factory overhead Divided by Manufacturing Overhead rate

Cafeteria P250,000

Maintenance P150,000

(150,000) (100,000)

Assembly P100,000

Finishing P60,000

150,000 100,000 (93,750) (56,250)

93,750 343,750 200,000 1.71875/dlh

56,250 216,250 250,000 0.865/mh

Guide: Step Method starting with cafeteria Est. Dept. OH costs Cafeteria: Maintenance: Assembly: Finishing: Maintenance

Cafeteria P250,000

Maintenance P150,000

(1,984.13) (148,809.52) (99,206.35)

1,984.13

Assembly P100,000

Finishing P60,000

148,809.52 99,206.35

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Cost Accounting and ControlAccounting for Manufacturing Overhead Assemble: Finishing: Total est. Factory overhead Divided by Manufacturing Overhead rate

(94.990.08) (56,994.05)

94, 990.08 343,799.6 200,000 1.718998/dlh

56,994.05 216,200.4 250,000 0.8648016/mh

Guide: Algebraic Method Service Department Cafeteria Maintenance P250,000 P150,000 100 20

Estimated Dept. OH Number of employee Services provided by: Cafeteria: .8% Maintenance: 61% Step 1: Set up the Cost formula Cafeteria = 250 000 + 61% (Maintenance) Maintenance = 150 000 + .8% (Cafeteria) Step 2: Compute the new value of each service department Cafeteria = 250 000 + 61% (150 000 + .008 Maintenance) = 250 000 + 91 500 + .00488 Maintenance 0.99512 Cafeteria = 341 500 Cafeteria = 341 500 / 0.99512 Cafeteria = 343 174.69 Maintenance

Pr Producing oducing Department Assemble Finishing P100,000 P60,000 1,500 1,000 59.52% 24%

39.68% 15%

= 150 000 +.8% (Cafeteria) = 150 000 + .8% (343 174.69) = 150 000 + 2 745.40 = 152 745.40

Step 3: Allocate the service costs to the producing departments Allocation Cafeteria Estimated Department OH 250,000 Cafeteria: (343 174.69) Assembly: Finishing: Maintenance Maintenance Assemble: Cafetreria 93,174.69 Finishing: Total allocated service costs

Maintenanc Maintenancee 150,000

Assembly 100,000

Finishing Finishing 60,000

204 257.57 136 171.72 2745.20 (152,745.4) 36 658.90

240 916.47

22 911.81 159 083.53

Assessment Task: THEORY 1. Manufacturing overhead applied was P120,000, while actual overhead incurred was P124,000. Which of the following is always true of the above? 2. Depreciation based on the number of units produced would be classified as what type of cost? 3. The only method of allocating service department costs to producing departments that considers reciprocal services is called? 4. In the determination of factory overhead application rates, the numerator of the formula is the: 5. The variable factory overhead application rate under the normal, practical, and expected activity levels would be the same. 6. Which productive capacity level does not consider product demand, but at the same time accounts for anticipated and unavoidable interruptions in production? 7. Which productive capacity level does not have provision for either a lack of sales orders or interruptions in production (due to work stoppages, machines repairs and maintenance, set-up time, holidays, weekends, etc.

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Cost Accounting and ControlAccounting for Manufacturing Overhead

8. Which productive capacity level is based on estimated production for the next period. 9. Which of the following describes a part of the step method of allocation? PROBLEMS The following information for Ram Corporation relates to questions 1 and 2 Service departments (total estimated costs) Building and ground maintenance Storeroom Producing departments (estimated factory overhead costs) Department A Department B Est. DL Hrs . Bldg. and ground maintenance Storeroom Department A 1,925 Department B 1,200

P21,960.40 15,990.00 42,000.00 51,000.00 Est. Sq. Ft. No. of Requisitions 750 150 130 40 890 2,500 2,330 1,400

The base to be use for allocating the cost of Building and ground maintenance is square feet and for the storeroom cost is the number of requisitions. Direct labor hours are used to compute the producing departments’ factory overhead application rate. 1. Using the direct method, what is Department A’s factory overhead rate?

Est. Dept. OH costs B&G Department A Department B Storeroom Department A Department B Total est. Factory overhead Divided by Manufacturing Overhead rate 2.

Department A 42,000

Department B 51,000

B&G 21,960.40

15890.6

(6,069.8) (15890.6)

6,069.8

10,250 5,740 72.630.6 1,200 60.5255

58,319.8 1,925 30.296

Storeroom 15,990

(10,250) (5,740)

Using the algebraic method, compute for the Building and Grounds Maintenance Department total amount to be allocated to the Storeroom Service Department and both producing departments. (Take all calculations to four decimal places but round all answers to the nearest peso) Answer: B&G = 21,960.40 + 150/4090(15,990+130/3350 = 21,960.40 + 592.222 +0.0014372581536 0.9986 = 22,552.622/0.9986 =22, 584.24

The following information relates to Fay Corporation for the past accounting period. Producing Departments C D Direct costs P15,000 P20,000 Proportion of service by A to: 60% 30% Proportion of service by B to: 20% 50%

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Service Departments A B P80,000 P60,000 10% 30% -

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Cost Accounting and ControlAccounting for Manufacturing Overhead

Using the algebraic method, department A’s cost allocated to department C is: Department A = 80,000 +.30 (60,000 +.10) = 80,000 + 18,000 +.03 .97 = 98,000 =101,031 Department C 60% 60,618.6

4.

Department D 30% 30,309.3

Department B 10% 10,103.1

Using the algebraic method, department B’s cost allocated to department C is: Department B = 60,000 + .10 (101,031) = 60,000 + 10,103.1 = 70,103.1 Department C 20% 14,020.62

Department D 50% 35,051.55

Department B 30% 21,030.93

AMR Corp . currently uses a firm-wide overhead application based on expected direct labor hours. The following information is anticipated at the beginning of the year. Department A Department B Direct materials P25.00/lb. P17.00/lb. Direct labor hours 10,000 5,000 Machine hours 2,000 10,000 Overhead P115,000 P85,000 Labor hours P15.00/hr. P12.00/hr. 5. If the firm maintains the current method, the overhead application rate is: Answer: 200,000/15,000 = Php 13.33 6. If departmental rates were adopted, what would be the rates for Departments a (based on DLH) and B (based on MH). Answer: Department A = 115,000/10,000 = 11.5 Department B = 85,000/10,000 = 8.50 7. Sensual Scent, Inc. Uses a job-order cost system with machine hours as the overhead as the overhead base. At the beginning of last year, Sensual estimated 38,000 machine hours and P152,000 of manufacturing overhead costs. For the year, only 37,500 machine hours were logged but P153,500 of overhead cost was incurred. What is Sensual’s under-or overapplied manufacturing overhead? Answer: Estimated cost per hour = 152,000/38,000 =4 Actual = 37 500*4 =150,000 – 153,500 = 3,500 underapplied The following information relates to Donna Corporation for the last year. Donna uses direct labor hours as an overhead base. Estimated direct labor hours 136,000 hours Estimated manufacturing overhead costs P108,800 Actual manufacturing overhead costs P108,480 Applied manufacturing overhead costs P110,000 8. What was the actual number of direct labor hours worked last year at Donna? Estimated Overhead per direct labor hours = 108,800/136,00 =.80 Actual Overhead Incurred =108,480/.80

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Cost Accounting and ControlAccounting for Manufacturing Overhead = 135,600

D’santos uses a job-order cost system with machine hours as an overhead base. The following information relates to D’Santos for last year: Estimated machine hours for the year 42,000 Actual machine hours for the year 40,800 Predetermined overhead rate P1.50 per MH Underapplied factory overhead P2,600 9. What is the peso amount of the Est. OH, Applied OH, and Actual OH? Answer Estimated OH = 63,000(42,000 * 1.50) Applied OH = 61,200 (40,800*1.50) Actual = 63,800 (61,200 +2,600)

10. Justine Company budgeted total variance overhead costs at P180,000 for the current period. In addition, they budgeted costs for factory rent at P215,000, costs for depreciation of office equipment at P12,000 costs for office rent at P92,000, and costs for depreciation of factory equipment at P38,000. All these costs were based upon estimated machine hours of 80,000. At the end of the period, the Factory Overhead control account had a balance of P387,875. Actual machine hours were 74,000. What was the over or underapplied factory overhead for the period? Answer: Budgeted total variance overhead costs P180,000 costs for factory rent at P215,000 costs for depreciation of factory equipment at P38,000 Total 433,000/80,000 Estimated Overhead per Unit 5.4125 Actual Machine Hours 74,000 * 5.4125 Actual Overhead 400,525 Balance In Control Account (387,875) 12,650 Over appllied 11. Marvin Company uses a job costing system and applies overhead to products on the basis of direct labor cost. Job no. 75, the only job in process on January 1, had the following costs assigned as of that date: direct materials, P40,000; direct labor, P80,000, and factory overhead , P120,000. The following selected costs were incurred during the year 2009: Traceable to jobs: Direct materials P178,000 Direct labor 350,000 P523,000 Not traceable to jobs: Factory materials and supplies P46,000 Indirect labor 235,000 Plain maintenance 73,000 Depreciation on factory equipment 29,000 Other costs 76,000 459,000 Marvin’s profit plan for the year included budgeted direct labor of P320,000 and factory overhead of P384,000. Assuming no work-in-process on Dec.31, Marvin’s overhead for the year was. Answer Answer: Estimated Overhead per Direct Labor Hours = 384,000/320,000 = 1.20 Actuals Direct Labor Overhead = 350,000 * 1.20 = 420,000 – 459,000 = 39,000 Underapplied

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Cost Accounting and ControlAccounting for Manufacturing Overhead

12. Candice Corporation produces reusable Christmas cards in two departments: Printing and Laminating. These departments are supported by two service departments: Personnel and Maintenance. Personnel uses the number of employees as an allocation base and Maintenance uses machine hours. The expected level of activity for next quarter is shown below: No. of employees Machine hours Personnel 40 Maintenance 60 Printing 120 60,000 Laminating 180 40,000 Allocations are made in the order shown above. Budgeted cos...