FACTORY

OVERHEAD
AFAR 1
 HAPPY
BIRTHDAY!

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• FACTORY OVERHEAD
INCLUDES: ALL
MANUFACTURING COSTS EXCEPT
DIRECT MATERIALS AND DIRECT
LABOR

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• FACTORY OVERHEAD
INCLUDES:
INDIRECT LABOR
BUT NOT INDIRECT
MATERIALS.

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FACTORY OVERHEAD
CAN BE
A VARIABLE COST
OR A FIXED COST.

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FACTORY OVERHEAD
• IS ALSO KNOWN AS
✘ Manufacturing overhead

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FACTORY OVERHEAD
• IS ALSO KNOWN AS

✘ Factory expense

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FACTORY OVERHEAD
• IS ALSO KNOWN AS

✘ direct manufacturing cost

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FACTORY OVERHEAD
• IS ALSO KNOWN AS

✘ Factory burden

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FACTORY OVERHEAD
• IS ALSO KNOWN AS

✘ Production overhead

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FACTORY OVERHEAD
• IS ALSO KNOWN AS

✘ direct production costs

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 OBJECTIVES:

✘ Define Factory Overhead

✘Nature of Factory Overhead
✘Components of Factory Overhead
✘ Purpose of Overhead Rates
✘ Use of a Predetermined Overhead
Rate
✘ • Bases to be Used
✘ • Selection of Activity Level
•

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✘ Factory burden
✘ Production overhead
✘ Indirect production costs
✘ Manufacturing expense
✘ Manufacturing overhead
✘ Factory expense
✘ Indirect manufacturing cost

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✘ Indirect material, indirect labor, all
other factory costs that cannot be
conveniently identified with or
charged directly to specific jobs,
lots, products, or other final cost
objects.

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✘ Factory overhead includes
factory costs other than direct
materials and direct labor.

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✘ INDIRECT MATERIAL
✘ INDIRECT LABOR
✘ FACTORY INSURANCE
✘ FACTORY DEPRECIATION OF EQUIPMENT
AND MACHINERIES
✘ REPAIRS AND MAINTENANCE OF FACTORY
ASSETS
✘ RENT
✘ UTILITIES

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✘ Factory overhead costs are not
readily available, accordingly,
predetermined overhead rate are
used to estimate the factory
overhead costs.

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 Factors to be
Considered
• BASE TO BE USED
• SELECTION OF ACTIVITY
LEVEL
➢ PHYSICAL OUTPUT BASE
➢ DIRECT LABOR COSTS BASE
➢ DIRECT LABOR HOURS BASE
➢ DIRECT MATERIAL COSTS BASE
➢ MACHINE HOURS BASE
➢ TRANSACTION BASE

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VA Wal Mathulog Company has the following
budgeted data for the year.

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HECABB Company estimates its factory overhead for the
next period at P1,000,000. It is estimated that 20,000 units
will be produced at a materials cost of P800,000 and will
require 50,000 direct labor hours at an estimated costof
P500,000. The machine hours will run about 160,000
hours.
Required: The predetermined factory overhead rated
based on: •
✘ Material Cost
✘ • Units of Production
✘ • Machine Hours
✘ • Direct Labor Cost
✘ • Direct Labor Hours

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The of the overhead rate is
an estimate of overhead at a certain
activity level, and the is
an estimate of the allocation base at
the same level of activity.
● The the assumed activity
level, the lower the predetermined
overhead rate
● The the activity level, the
smaller the fixed portion of the factory
overhead rate.
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 Accounting for
Factory Overhead
BSAIS 3-2
 Accounting for factory overhead

Factory Overhead ✘ Calculation of an overhead

-indirect materials, indirect labor rate
and all other factory costs that
cannot be conveniently identified
with or charges directly to specific ✘ Actual Factory overhead
jobs.

Predetermined overhead rates ✘ Applied Factory Overhead

Factors Considered in Selecting and the Over- or
Overhead Rates Underapplied Amount

✘ Changing Overhead Rates

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 1.
Calculation of an
overhead rate
Wilma M. Rivera
Variable and Fixed Cost
✘ Total variable cost are a function of volume
✘ Variable cost per unit is constant within the
relevant range.
✘ Fixed costs have a constant total amount
within the relevant range, so their cost per
unit is different for each production level.

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 Calculation of an overhead rate

✘ Step 1: Identify the activity level to

be used for the base selected.

✘ Step 2: Each individual overhead

cost item is estimated or budgeted
at that activity level.

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 Assume that DiPinili products has an expected capacity
Example: level of 20,000 machine hours. At that activity level, factory
overhead estimated to total P300,000
DiPinili Products
Estimated Factory Overhead for 20xx
Expense Fixed Variable Total

Supervisors P 70,000 P70,000

Indirect Labor 9,000 P66,000 75,000

Overtime premium 9,000 9,000

Factory supplies 4,000 19,000 23,000

Repairs and maintenance 3,000 9,000 12,000

Electric power 2,000 18,000 20,000

Fuel 1,000 5,000 6,000

Water 500 500 1,000

Labor fringe benefits 10500 48,500 59,000

Depreciation – Building 5,000 5,000
Depreciation – Equipment 13,000 13,000

Property tax 4,000 4,000

Insurance (fire) 3,000 3,000

Total estimated factory overhead P 125,000 P175,000 P300,000

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 Calculation of an overhead rate
✘ Step 1: Identify the activity level to be used for the base
selected.
✘ Step 2: Each individual overhead cost item is estimated or
budgeted at that activity level.
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 300,000
𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑅𝑎𝑡𝑒 = = Assume that DiPinili products has an expected capacity
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟𝑠 20,000
level of 20,000 machine hours. At that activity level, factory
𝑭𝒂𝒄𝒕𝒐𝒓𝒚 𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝑹𝒂𝒕𝒆 = 𝑷𝟏𝟓. 𝟎𝟎 𝒑𝒆𝒓 𝒎𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓 overhead estimated to total P300,000

✘ Allocated to fixed and variable factory overhead

𝑃125,000 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
= 𝑃 6.25 𝐹𝑖𝑥𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
20,000 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟
𝑃175,000 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
= 𝑃 8.75 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
20,000 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟

𝑻𝒐𝒕𝒂𝒍 𝑭𝒂𝒄𝒕𝒐𝒓𝒚 𝒐𝒗𝒆𝒓𝒉𝒆𝒂𝒅 = 𝑷𝟏𝟓. 𝟎𝟎 𝒑𝒆𝒓 𝒎𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓

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 Factory Overhead
Actual FOH Applied FOH
Actual Fcatory overhead cost are Applied factory overhead is the amount of
recorded when incurred, as transactions cost allocated to output.
are journalized and posted to general
Work in Process xx
and subsidiary ledger; This recording is
Applied Factory Overhead xx
independent of the application of factory
overhead.

Overapplied FOH Underapplied FOH

A credit balance in the Factory A debit balance in the Factory Overhead.
overhead.
Actual Factory Overhead is more than the
Actual Factory Overhead is less than
Applied Factory Overhead.
the Applied Factory Overhead

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A picture is worth a thousand words
Example:
DiPinili Products’ actual machine
hours totaled 18,900 and actual
factory overhead totaled P292,000.
𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 = 𝐹𝑂𝐻 𝑟𝑎𝑡𝑒 𝑥 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 = 𝑃15.00 𝑥 18,900
Factory Overhead Control
𝑨𝒑𝒑𝒍𝒊𝒆𝒅 𝑭𝒂𝒄𝒕𝒐𝒓𝒚 𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 = 𝑷𝟐𝟖𝟑, 𝟓𝟎𝟎
P292,000
Factory Overhead Control 292,000
Indirect Cost account* 292,000 P283,500

Total
Work in process 283,500 Actual Total
Applied FOH 283,500 Overhead Applied
Overhead
Applied FOH 283,500
Factory Overhead Control 283,500

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Disposition of Over- or Underapplied Amount
If the amount of overapplied or underapplied factory overhead is
insignificant, it should be closed directly to Income Summary or to Cost
of goods sold as a period cost.

Factory Overhead Control

P292,000 Overapplied
Total Applied
P283,500 or
Total Actual Overhead
Underapplied
Overhead
P 8,500
Income Summary 8,500
Factory Overhead Control 8,500
Actual FOH > Applied FOH
= Underapplied or

Cost of Goods Sold 8,500

Factory Overhead Control 8,500

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Assuming the actual factory overhead amounted to 275,000

Factory Overhead Control

P275,000 Total Applied

P283,500 Overhead
Total Actual
Overhead P 8,500 Overapplied
or
Underapplied
Actual FOH < Applied FOH = Overapplied

Factory Overhead Control 8,500

Cost of Goods sold 8,500

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 Disposition of Underapplied Amount

DiPinili Products
Income Statement
For the Year Ended December 31, 20xx

Sales 1,600,000
Less: Cost of Goods Sold 1,193,500
Underapplied factory overhead 8,500 1,202,000

Gross Profit 398,000

Less: Marketing Expenses 150,000
Administrative Expenses 100,000 250,000

Operating Income 148,000

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 Disposition of Overapplied Amount

DiPinili Products
Income Statement
For the Year Ended December 31, 20xx

Sales 1,600,000
Less: Cost of Goods Sold 1,193,500
Overapplied factory overhead (8,500) 1,185,000

Gross Profit 415,000

Less: Marketing Expenses 150,000
Administrative Expenses 100,000 250,000

Operating Income 165,000

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 Disposition of Underapplied Amount

DiPinili Products
Cost of Goods Sold Statement
For the Year Ended December 31,20xx
Direct materials used P 400,000
Direct Labor used 500,000
Applied factory overhead 283,500
Total manufacturing cost 1,183,500
Less increase in work in process inventory 20,000 DiPinili Products
Cost of Goods Manufactured 1,163,500 Income Statement
For the Year Ended December 31, 20xx
Add decrease in finished goods inventory 30,000
Cost of Goods Sold 1,193,500
Sales 1,600,000
Add underapplied factory overhead 8,500
Less: Cost of Goods Sold 1,202,000
Adjusted Cost of goods sold 1,202,000 Gross Profit 398,000
Less: Marketing Expenses 150,000
Administrative Expenses 100,000 250,000

Operating Income
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148,000
 Disposition of Overapplied Amount

DiPinili Products
Cost of Goods Sold Statement
For the Year Ended December 31,20xx
Direct materials used P 400,000
Direct Labor used 500,000
Applied factory overhead 283,500
Total manufacturing cost 1,183,500
Less increase in work in process inventory 20,000 DiPinili Products
Cost of Goods Manufactured 1,163,500 Income Statement
For the Year Ended December 31, 20xx
Add decrease in finished goods inventory 30,000
Cost of Goods Sold 1,193,500
Sales 1,600,000
Less overapplied factory overhead 8,500
Less: Cost of Goods Sold 1,185,000
Adjusted Cost of goods sold 1,185,000 Gross Profit 415,000
Less: Marketing Expenses 150,000
Administrative Expenses 100,000 250,000

Operating Income
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165,000
 Allocation of Over- or Underapplied Amount

Suppose DiPinili Products in all previous years had treated over- or underapplied
factory overhead as an adjustments to income or expense. At the end of the current year the
company had P4,000 of underapplied factory overhead, and the balances in inventories and
cost of goods sold were:

Work in Finished Cost of

Process Goods Goods Sold
Direct materials P15,000 P 7,000 P 28,000

Direct labor 5,000 19,000 76,000

Applied factory overhead 5,000 19,000 76,000

Year – end balance P25,000 P 45,000 P 180,000

The over- or underapplied factory overhead usually is allocated to the three accounts in
proportion to their balances. The allocation would be?

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 Allocation of Over- or Underapplied Amount
Account Percentage
𝑊𝐼𝑃 25,000
balance of Total 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑊𝐼𝑃 = = = 𝟏𝟎%
𝑇𝑜𝑡𝑎𝑙 250,000
Work in Process P 25,000 10% 𝐹𝐺 45,000
Finished goods 45,000 18% 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝐹𝐺 = = = 𝟏𝟖%
𝑇𝑜𝑡𝑎𝑙 250,000
Cost of goods sold 180,000 72%
𝐶𝑂𝐺𝑆 180,000
Total P 250,000 100% 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝐶𝑂𝐺𝑆 = = = 𝟕𝟐%
𝑇𝑜𝑡𝑎𝑙 250,000

Work in process (10% x 4,000) 400

Finished Goods (18% x 4,000) 720
Cost of Goods sold (72% x 4,000) 2,880
Factory overhead control 4,000

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 Allocation of Over- or Underapplied Amount
Account Percentage
𝑊𝐼𝑃 5,000
balance of Total 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑊𝐼𝑃 = = = 𝟓%
𝑇𝑜𝑡𝑎𝑙 100,000
Work in Process P 5,000 5% 𝐹𝐺 19,000
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝐹𝐺 = = = 𝟏𝟗%
Finished goods 19,000 19% 𝑇𝑜𝑡𝑎𝑙 100,000
Cost of goods sold 76,000 76%
𝐶𝑂𝐺𝑆 76,000
Total P 100,000 100% 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝐶𝑂𝐺𝑆 = = = 𝟕𝟔%
𝑇𝑜𝑡𝑎𝑙 100,000

Work in process (5% x 4,000) 200

Finished Goods (19% x 4,000) 760
Cost of Goods sold (76% x 4,000) 3,040
Factory overhead control 4,000

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 Illustration 1:

The factory overhead for the Quota 𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑂𝐻 𝑓𝑜𝑟 𝑛𝑜𝑟𝑚𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
F𝑎𝑐𝑡𝑜𝑟𝑦 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 =
Manufacturing Company is estimated as 𝑁𝑜𝑟𝑚𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
follows:
15,000+45,000 60,000
F𝑎𝑐𝑡𝑜𝑟𝑦 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 = = = 𝑷𝟑. 𝟎𝟎
✘ Fixed Overhead = P15,000 20,000 20,000
✘ Variable Overhead = 45,000
✘ Estimated direct labor hours = 20,000
𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑂𝐻 = 𝐹𝑂𝐻 ℎ𝑟𝑠. 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑥 𝐹𝑂𝐻 𝑟𝑎𝑡𝑒
𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑂𝐻 = (20,000 𝑥 75%) 𝑥 𝑃3.00
Production for the month reached 75% of 𝐴𝑝𝑝𝑙𝑖𝑒𝑑 𝐹𝑂𝐻 = 15,000𝑥 𝑃3.00
the budget. In addition, actual factory 𝑨𝒑𝒑𝒍𝒊𝒆𝒅 𝑭𝑶𝑯 = 𝑷𝟒𝟓, 𝟎𝟎𝟎
overhead totaled P43,000.

Applied FOH 45,000

Calculate for the Following
✘ Applied factory overhead Actual FOH 43,000
✘ Is it Overapplied or underapplied? By Difference 2,000
how much?
Applied FOH > Actual FOH = Overapplied

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 Illustration 2:
X company uses job-order costing. It applies 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
overhead cost to jobs based on direct labor cost. For
a. F𝑎𝑐𝑡𝑜𝑟𝑦 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 =
𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡
the current year, the company estimates that it will
𝑃550,000
incur P25,000 in direct labor cost and P550,000 of a. F𝑎𝑐𝑡𝑜𝑟𝑦 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 = = 𝑷𝟐𝟐. 𝟎𝟎
manufacturing overhead. During the year, P30,000 of 𝑃 25,000
direct labor costs were incurred. Actual overhead costs
incurred were: b. Applied FOH = P22.00 x 30,000 = P660,000

× Indirect materials expense P100,000 Manufacturing Overhead

× Insurance expense 10,000
× Depreciation expense 75,000 P 100,000
× Indirect labor expense 150,000 10,000 P 660,000
× Utilities expense 25,000
75,000
× Rent expense 200,000
150,000
Required: 25,000
a) Compute the company’s predetermined overhead 200,000
rate.
P 100,000 Overapplied
b) Compute the amount of over or underapplied
overhead.
c) Prepare the necessary journal entry to close the c. Manufacturing Overhead 100,000
over or underapplied overhead. Cost of goods sold 100,000
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 Changing Overhead Rates

✘ Changes in production methods, prices,

efficiencies and sales forecasts makes
review and possible revision of overhead
rates necessary at least annually.
✘ Frequency of changes, on factors that
affect overhead rates, and on
management’s need and desire for
current cost data.

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 “Just because you can see
something, doesn’t mean
isn’t there. Some of the
most wonderful things in
the world are invisible.
Trusting in invisible things
makes them more powerful
and wondrous”.
- Kelly Bornhill

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