# Factory Overhead: Practical Problems and Solutions ### Reviewed by Editorial Team

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

## Factory Overhead: Practical Problems and Solutions FAQs ### True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.