FACTORY OVERHEAD Maria Cristina P.
Obeso, CPA, MBA
FACTORY OVERHEAD ( other term is indirect manufacturing cost, manufacturing overhead, factory
burden,factory expense)
- Refers to manufacturing costs not classified as direct materials or as direct labor
- Sum total of the indirect manufacturing costs or costs that cannot be conveniently identified
with nor directly charged to specific jobs or products or final cost objectives
Examples:
indirect materials, indirect labor, factory repairsand maintenance, supervision, depreciation
of factory property and equipment , fringe benefits of factory workers
Characteristics of Factory Overhead
1. Factory overhead is multi-sources and is an invisible part of the cost of the finished product
2. Factory overhead cannot be directly traced to a job or product based on stores requisitions (as
in direct materials) and time tickets (as in direct labor)
3. Factory overhead consists of different items that differ in behavior in relation to changes in
volume of production
Objectives in Accounting for Factory Overhead
- Actual factory overhead (factory overhead incurred) is compared with predetermined
figures as shown in budgets or estimates and the difference (or variance) is analyzed to
determine the probable cause or causes thereof.
CHARGING FACTORY OVERHEAD TO PRODUCTION
Use of Predetermined Factory Overhead Rate
- Charging factory overhead to production at a predetermined rate paves the way to its
equitable and logical allocation
Factory overhead rate = Estimated factory overhead
Estimated base
Bases Used in Charging Factory Overhead to Production:
a. Physical output or units of production
b. Direct labor hours
c. Machine hours
d. Direct materials cost
e. Direct labor cost
Example:
Base to be used is Direct Labor Hours
Estimated Factory Overhead = P50,000
Estimated Base = 100,000 Direct labor hours
Factory Overhead rate = 50,000 /100,000 direct labor hours = P0.50 / direct labor hour
COMPUTATION OF FACTORY OVERHEAD APPLIED (estimated FOH applied to production)
Factory Overhead Applied = Factory Overhead rate x Actual Base
Example:
Base to be used is Direct Labor Hours
Estimated Factory Overhead = P50,000
Estimated Base = 100,000 Direct labor hours
FOH Rate = P0.50/direct labor hour
Actual Base = 200,000 direct labor hours
Factory Overhead Applied = 0.50/ direct labor hours x 200,000 direct labor hours
= 100,000
FACTORY OVERHEAD VARIANCE
- The difference between the total amount of factory overhead charged to production
(factory overhead applied) and what has been incurred (actual factory overhead )
OVERAPPLIED FACTORY OVERHEAD
Factory Overhead Applied > Actual Factory overhead FOH Variance –overapplied
150,000 100,000 50,000 FOH variance – overapplied
UNDERAPPLIED FACTORY OVERHEAD
Actual Factory Overhead > Factory overhead applied FOH Variance –underapplied
150,000 100,000 50,000 FOH variance – underapplied
FIXED AND FLEXIBLE BUDGETS
The Factory overhead budget is fixed when budget allowances for other levels of operations cannot
be estimated because of lack of information as to behavior patterns of FOH
The Factory overhead budget is flexible when budget allowances for other levels of operations can be
reasonably estimated because of sufficiency of information
ANALYSIS OF FACTORY OVERHEAD VARIANCE
Factory overhead variances are analyzed to determine their possible causes, to call the attention of the
parties responsible therefor and consequently, to minimize the variances in future operations
SPENDING VARIANCE (expense or budget variance )
- This is due to to incurring an amount that differs from what has been budgeted or allowed
per budget
FIXED BUDGET ANALYSIS FLEXIBLE BUDGET ANALYSIS
Spending Variance : Spending Variance :
Actual FOH Actual FOH
Less: Budgeted FOH Less: Budget allowance on actual capacity
Spending Variance Unfavorable (Favorable) Spending Variance Unfavorable (Favorable
IDLE CAPACITY VARIANCE (capacity or volume variance )
- This is due to operating at a level different from what is normal or budgeted
FIXED BUDGET ANALYSIS FLEXIBLE BUDGET ANALYSIS
Idle Capacity Variance : Idle Capacity Variance :
Budgeted Factory Overhead Budget allowance on actual capacity
Less: Applied Factory Overhead Less: Applied Factory Overhead
Idle Capacity Variance Unfavorable Idle Capacity Variance Unfavorable
(Favorable) (Favorable)
CONTROLLING ACCOUNTS AND SUBSIDIARY RECORDS
The general ledger account Factory Overhead Control is used for all factory overhead items
incurred.
They are recorded in journals and the details are kept in Factory overhead subsidiary ledger of
Factory Overhead Analysis Sheet
DISPOSITION OF FACTORY OVERHEAD VARIANCES
Factory Overhead Variance, when insignificant in amount, is treated as a period cost and is
shown as an adjustment to cost of goods sold.
Factory overhead variance, when significant in amount, is treated as an adjustment tocost of
goods sold, work in process inventory and finished goods inventory
ACCOUNTING FOR FACTORY OVERHEAD
1) To charge overhead to production
Work in process 20,800
Factory Overhead Applied 20,800
2) To take up Factory overhead incurred
Factory overhead control 21,000
Cash and other credits 21,000
3) To set up the variance or close factory overhead applied and factory overhead control *
Factory Overhead Applied 20,800
Factory Overhead Variance 200
Factory Overhead Control 21,000
4) To close the variance to cost of goods sold **
Cost of Goods Sold 200
Factory Overhead Variance 200
Note: * If the Factory Overhead applied is greater than Factory Overhead Control, the entry for
number 3 is:
Factory Overhead Applied xx
Factory Overhead Variance xx
Factory Overhead Control xx
** the entry for number 4 will be
Factory Overhead Variance xx
Cost of Goods Sold XX
CAPACITY PRODUCTION
In the estimation of manufacturing overhead, as well as the estimation of the base to be used
for allocation, it is important to determine what capacity of production should be adopted.
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 stoppage of production within or not within the control of management
B. PRACTICAL CAPACITY
- A capacity of production that provides allowance for circumstances that might result to
stoppage of production
C. EXPECTED ACTUAL CAPACITY
- A capacity concept based on a short range outlook which is feasible only for firms whose
products are seasonal or when the market and style changes allow price adjustments
according to competitive conditions and customer demands
D. 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 which come with seasonal and cyclical variations.
This capacity is commonly used in the computations of overhead rates.
