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Chapter 9
This chapter
Discusses the methods, procedures and
bases available for applying factory overhead Describes methods and procedures for classifying and accumulating actual factory overhead Shows computations for over or underapplied factory overhead Analyzes the total net variance
Factory Overhead
Factory overhead is generally defined as:
Indirect materials Indirect labor All other factory expenses that cannot conveniently be identified with specific jobs or products.
Factory Overhead
Also known as:
Factory burden Manufacturing expense Manufacturing overhead Factory expense Indirect manufacturing cost
characteristics:
Physical output
Estimated factory overhead Estimated units of production = factory overhead/unit
Estimated factory overhead *100 = % of overhead/direct labor cost Estimated Direct labor cost
Machine hours
An overhead rate in which expenses and production are based on average utilization of the physical plant over a time period long enough to level out the highs and lows that occur in every business venture The rate does not change because of changes in actual production
based on the expected actual output for the next production period. The use of predetermined rate based on expected actual production is often due to the difficulty of judging current performance on a long range or normal capacity.
Example
Normal capacity= 150,000 DLH
Solution
Fixed expense Variable expense: 150,000 hrs*0.50 120,000 hrs*0.50
Total estimated overhead Estimated DLHs Factory overhead/hr Fixed overhead/ hr
120,000
75,000
120,000
Absorption costing Fixed and variable expenses both are included in overhead rates.
Direct costing/ variable costing Only variable overhead is included in overhead rates. The fixed expense does not become a product cost but is treated as a period cost.
Estimated variable factory overhead = variable portion of factory overhead rate Estimated Direct labor hours
responsible for them And making comparisons with the amount budgeted for the level of operations achieved.
overhead transactions are: Analysis Journalizing Posting the factory overhead subsidiary ledger and the factory overhead general ledger control account.
overhead in the journal are: Purchase vouchers Materials requisitions Labor time tickets General journal voucher.
over applied
These over- and under applied must be analyzed
carefully; as they are the source of much information needed by management for controlling and judging the efficiency of operations and the use of available capacity during the particular period.
Assignment
The Carrcroft Company estimates its factory overhead for the
next period at $54,000. it is estimated that 36,000 units will be produced at a material cost of $45,000. Production will require 24,000 direct labor hours at an estimated cost of $120,000. The machines will run about 1,600 hours. Required: the predetermined factory overhead rate based on : Material cost Units of production Machine hours Direct labor cost direct labor hours.
single level of volume based on best estimate of the level of production and sales for the coming period. The sales budget is the starting point. From the sales budget, production requirements are determined.
Sales Budget
This is the basis for
preparing all other budgets. Projects the volume of sales both in units and dollars.
Production Budget
After the sales forecast and inventory levels
100,000
4,500 104,500 2,500 102,000 8,500
once the production requirements have been determined. The desired ending inventory for each material is added to the quantity needed to meet production needs, and that total is reduced by the estimated beginning inventory to determine the amount of materials to be purchased.
requirements are used to prepare the direct labor budget. Standard labor time allowed per unit is multiplied by the number of required units to obtain the total direct manufacturing labor hours.
Indirect materials
Indirect labor Depreciation of building Depreciation of machinery and equipment Total factory overhead cost
$225,000
375,250 85,000 67,500 $752,750
direct labor, and factory overhead budgets have been completed. The estimated beginning inventories and the desired ending inventories of WIP and Finished Goods are included to compute the cost of goods sold.
administrative expenses budget may be prepared once the sales forecast has been made. This budget has separate sections for selling and administrative expenses.
completed, the budgeted income statement may be prepared. If the budgeted profit does not meet expectation, management may wish to reevaluate their original expectations.
Shows the anticipated cash flow and the timing of cash receipts and disbursements.
Based on anticipated sales, credit terms, the economy, and other relevant factors. Reflects how the companys cash position will be affected by paying their liabilities.
Liabilities budget
A plan for the timing of acquisitions of buildings, equipment, or other significant assets during the period.
Flexible Budgeting
A plan of what will happen to a company
under varying sets of conditions. The company plans in advance what the effect will be on revenue, expense, and profit if sales or production differ from the budget. Standard production is determined and the initial calculation of variable and fixed costs is based on this level of production.
Direct labor:
Cutting ($3.75/unit) Assembly ($2.40/unit) Variable FOH ($6.93/unit) Contribution Margin Fixed FOH and S & A expense Operating income
194,040
$3,161,760 773,825 $2,387,935
206,823
$3,158,177 770,550 $2,387,627
12,763 U
$3,583 u 3,275 F $308 u
Variance Analysis
Spending Variance-a variance due to budget
or expense factors Idle capacity Variance- a variance due to volume or activity levels
Spending Variance
The budget figures represents the budget for the
normal capacity.
This should not increase the factory overhead costs
but should be recorded separately and be considered a part of total manufacturing costs.
The idle capacity can be computed by multiplying the
$292,000
750 unfavorable
Spending variance Budget allowance-based on capacity utilized Fixed factory overheads budgeted (in total)$125,000 Variable factory overheads (190,000 actual hours* 0.875) 166,250 Idle Capacity Variance Applied Factory overhead(190,000 hrs*1.50)
Factory overhead underapplied (292,000-$285,000)
$291,250
6,250 unfavorable
goods sold.
Journal Entries
Cost of goods sold
Factory overhead
Or Income Summary Factory overhead