# Factory Overhead: Practical Problems and Solutions

### Reviewed by Subject Matter Experts

Updated on March 03, 2023

### Problem 1

IQIZ estimated its factory overhead for the next period at \$160,000. It is estimated that 40,000 units will be produced at a materials cost of \$200,000.

Production will require 40,000 man-hours at an estimated wage cost of \$80,000. The machines will run for approximately 25,000 hours.

Required: Calculate the factory overhead rate that may be used in applying FOH to production on each of the following bases:

• Materials cost
• Direct labor cost
• Direct labor hours
• Machine hours
• Units of production

### Solution

1. Material Cost Basis

Formula:

= (Estimated factory overhead / Estimated material cost) x 100

= (\$160,000 / \$200,000) x 100

= 80%

2. Direct Labor Cost Basis

Formula:

= (Estimated FOH / Estimated DL cost) x 100

= (\$160,000 / \$80,000) x 100

= 200%

3. Direct Labor Hours Basis

Formula:

= (Estimated FOH / Estimated DL hours) x 100

= \$160,000 / 40,000 hrs.)

= \$4.00 per hour

4. Machine Hours Basis

Formula:

= Estimated FOH / Estimated machine hours

= \$160,000 / 25,000 hrs.

= \$6.40 per machine hour

5. Units of Production Cost

Formula:

= Estimated FOH / Estimated no. of units

= \$160,000 / 40,000 hours

= \$4.00 per unit

6. Prime Cost Basis

Formula:

= Estimated FOH / Estimated prime cost

= (\$160,000 / (\$200,000 + 80,000)) x 100

= 89%

## FOH Variances

### Problem 2

The factory overhead for the King Manufacturing Company is estimated as follows:

• Estimated direct labor hours = 20,000

Production for the month reached 75% of the budget. In addition, actual factory overhead totaled \$43,000.

Required: Calculate the following:

• Applied factory overhead (i.e., overapplied or underapplied)
• Spending and capacity variances

### Working

FOH Applied Rate

Formula:

= FOH applied for normal capacity / Normal capacity

= \$60,000 (15,000 + 45,000) / 20,000 hrs.

= \$3 per hour

Applied FOH for Actual Capacity or Capacity Attained

Formula:

= Actual capacity x FOH hrs. x \$3

= (20,000 x 75%) x \$3

= 15000 hrs. x \$3

= \$45,000

Budgeted Allowance

Formula:

= Fixed cost + Variable cost for actual capacity

= \$15,000 + 33,750*

= \$48,750

* Variable Cost for Actual Capacity

Formula:

= Actual capacity x Variable cost rate

= 15,000 x \$2.25*

= \$33,750

* Variable Cost Rate

Formula:

= Variable cost for normal volume / Normal volume

= \$45,000 / 20,000 hrs.

=\$2.25 per hour

### Solution

1. Overapplied or underapplied FOH

2. Variances

Spending variance

Capacity variance

Variance check

## High-Low Point Method

### Problem 3

The burden rate of John & Co. is \$2.00 per hour. The budgeted overhead for 3,000 hours per month is \$8,000 and at 7,000 hours is \$12,000. Actual factory overhead for the month was \$9,000 and actual volume was 5,000 hours.

Required: Calculate the following:

• Variable overhead in burden rate
• Normal volume
• Idle capacity variance
• Spending variance

### Solution

 Activity Level Budgeted FOH (hrs.) (\$) 7,000 12,000 3,000 8,000 4,000 4,000

#### 1. Variable Cost Rate/V.C. in burden rate

Formula:

= Difference in burden FOH / Difference in activity level

= \$4,000 / 4,000 hrs.

= \$1 per hour

 Budgeted FOH for 7,000 hrs. \$12,000 Less VC for 7,000 hrs. (7,000 x 1) \$7,000 Fixed Cost \$5,000 OR Budgeted FOH for 3,000 hours \$8,000 Less VC for 3,000 hours (3,000 x 1) \$3,000 Fixed Cost \$5,000

#### 3. Normal Volume/Standard Activity Level

Formula:

= Fixed FOH Cost / Fixed FOH Cost Rate

= \$5,000 / \$1

= 5,000 hrs.

Formula:

= Actual capacity x FOH applied rate

= 5,000 x 2

= \$10,000

#### 5. Over- or Under-absorbed FOH

 Applied FOH for Capacity Attained \$10,000 Less Actual FOH \$9,000 Overapplied FOH \$1,000

#### 6. Capacity Variance

 FOH Applied for Capacity Attained \$10,000 Less Budgeted Allowance \$10,000

#### 7. Spending Variance

 Actual FOH \$9,000 Less Budgeted Allowance \$10,000 1,000 (Favourable)

Variance check

Calculations

 Fixed FOH Rate Applied Burden Rate \$2.00 Less Variable Rate \$1.00 Fixed Burden Rate \$1.00

Budgeted allowance:

= Fixed cost + Variable cost for capacity attained

= 5,000 + (5,000 x 1)

= 5,000 + 5,000

= \$10,000