nos wholly variable in nature but have characteristics of both.

Mixed factory
Page 9 overhead
ing ts must ultimately be separated into their fixed and variable components for
CHAPTER 1
the purposes of planning and control.
ACCOUNTING FOR FACTORY OVERHEAD BUDGETING FACTORY OVERHEAD COSTS
LEARNING OBJECTIVES udgets are management's operating plans expressed in quantitative terms,such
as
Upon of this chapter,you should be able to
0
Compute a factory overhead rate using the different bases
units of production and related costs.After factory overhead costs have been
Apply the concept of actual factory overhead and applied factory overhead
classified as either fixed,or variable,budgets can be prepared for expected
00 levels of
Identify the compute the different methods of allocating budgeted service production.The separation of fixed and variable cost components permits the
department to producing departients company to prepare a flexible budget.
at FACTORS TO BE CONSIDERED IN THE COMPUTATION OF
Compute the different factory overhead variances OVERHEAD
Apply the concept of activity based costing RATE
All costs incurred in the factory that are not direct materials or direct labor are 1.
generally termed as factory overhead.One method to determine whether a BASE TO BE USED
factory a.Physical output
expenditure is a factory overhead item is to compare it to the classification b.Direct materials cost
standard
C. Direct labor cost
established for direct materials and direct labor costs.If the expenditure cannot
be d.Direct labor hours
charged,to either of these two"direct"factory accounts,it is classified as e.Machine hours
factory 2.ACTIVITY LEVEL TO USE
overhead.Factory overhead refers to the cost pool used to accumulate all a.Noral capacity
indirect b. Expected actual capacity
manufacturing costs.Examples of factory overhead include the following: 3.
Indirect materials and indirect labor INCLUSION
Heat,light,and power for the factory OR EXCLUSION OF
Rent on factory building FIXED
Depreciation on factory building and factory equipment FACTORY
Maintenance of factory building and factory equipment OVERHEAD
Factory overhead costs are divided into three categories on the basis of their a.Absorption costing-method used for cost accounting
behavior
b.Direct costing-method used for internal reporting(management
in relation to production.The categories are(1)variable overhead(2)fixed
overhead services)

and(3)mixed overhead. 4.USE OF SINGLE RATE OR SEVERAL RATES

Variable factory overhead costs-these are the factory overhead costs that vary a.Plant-wide or blanket rate-one rate for all producing departments
in b.Departmentalized rate-one rate for each producing department.
direct proportion to the level of production,within the relevant range.Variable 0
cost hn
per unit remains constant as production either increases or decreases.Total
variable
Page 11
cost varies in direct proportion to production,that is,the greater the number of
unting
units
Chapter 8 Accounting for Factory Overhead
produced,the higher the total variable costs
219
Foxed factory overhead costs -these are the factory overhead costs that
remaice ea olly fixed
onsant within the relevant range regardless of the varying levels of production BASE TO BE USED
nal remains constant but the fied eost per unit varies inversely with the overhead
prodietions ents for
bais,the greater the number of un i goduced,the lower the fieed cot beruet a The base to be used should be related to functions represented by the
the advantage of masse produetion -u the more we produce the lesser the overhead cost
manufacturing cost per unit. being applied.If factory overhead is labor-oriented,the most appropriate base
to use
is direct labor hours or direct labor cost.If factory is investment-
Page 10
oriented,related to
C
operation of machinery,then the most appropriate base will be machine
Cost Accounting hours.On the
218 such as
B other hand,if factory overhead is material-oriented,then material cost might be
Moixed factory overhead costs-these factory overhead costs are neither e been
wholly fixed
considered as the most appropriate base.The simplest of all bases is physical
output
vels of Percentage of direct material cost
or units of production. 5.Units of production
its the This is most simple method to use because units produced are readily
1.Direct labor hours available.This method is appropriate when a company or department
This is the most commonly used base or denominator in the computation of manufactures only one product.The formula is:
HEAD Factory overhead rate= Estimated factoryoverhead
the predetermined factory overhead rate.The number of direct labor hours Estimated units of production
spent for a particular is readily available on the payroll sheet.This base Factory overhead rate/unit of production
should be used if it can established thai there is a direct relationship between
factory overhead and direct labor hours.It maybe used also if there is a Page 13
great disparity in hourly wage rates.The formula is expressed as: unting
Factory overhead rate=Estimated factory overhead Chapter 8 Accounting for Factory Overhead
Estimated direct labor hours 221
＝Factory overhead.rate/direct labor hour factory
Direct labor cost LLUSTRATIVE PROBLEM 1
This method is recommended if it can established that there is a direct The Round Table Company estimates factory overhead at P450,000 for the
Y next fiscal
relationship between labor cost and factory overhead.Just like direct labor anies or
hours,the direct labor cost is readily available on the payroll sheet.Labor year.It is estimated that 90,000 units will be produced at a material cost of
P600,000.
rates do not change as often as material cost,so this base is more reliable
factory.
nt
Conversion will require an estimated 100,000 direct labor hours at a cost of
that material cost.This base should not be used if there is little relationship P3.00 per
between labor cost and factory overhead.For example if overhead is dditional
composed largely of depreciation and equipment related cost.The formula hour,with 45,000 machine hours.
IS: cord to
Factory overhead rate=Estimated factory overhead x100 Required:Compute the predetermined factory rate based on;
Estimated direct labor cost S:
＝Percentage of direct labor cost a.Material cost
b.Units of production
Page 12 Machine hours
Cost Accounting Direct labor cost
Ch Direct labor hours
220 SOLUTION TO ILLUSTRATIVE PROBLEM 1
3.Machine hours a.,Factory overhead rate
The Est.factory overhead
This is appropriate when a direct relationship exist between factory costs
yeai Est.direct mat.cost
derhead cost and machine hours.This may occur in companies or terials
10 priate
epartments that are largely aufomated so that majority of the factory P 450,000 x 100
hou pany.
overhead cost consist of depreciation on factory equipment.Additional P 600,000
summarize the total machine hours used for each job.The formula is: ies at
work will be required because each machine will have a time record to base
Rec 75%of direct mat.cost
Factory overhead rate=Estimated factory overhead duct.
Estimated machine hours. b.Factory overhead rate
＝Factory overhead rate/machine hour Est.factory overhead
S0 Est.units of production
4.Direct material cost P 450,000
This method is appropriate if it can be inferred that factory overhead costs 90,000 direct labor hours
are directly related to direct material cost as in cases where direct materials P 5.00/unit
are a very large part of total cost.Direct material cost is not appropriate dily
base to when more than one product is manufactured by a company. c.Factory overhead rate
Different products require different materials and different quantities at Est.factory overhead
that,so it will be very inconvenient to use materials cost as the base ent
because we will have compute a factory overhead rate for each product. Est.machine hours
The formula is: P 450.000
Factory overhead rate= Estimated factory overhead x 100- 45,000 machine hours
Estimated direct material cost ＝
＝
P 10.00/machine hour produced.On the other hand,service departments,which include such activities
as
Page 14 maintenance,personnel.employee services,and the provision of heat,power,and
222 light,are necessary for the entire factory-including the producing departments-
to
Cost Accounting
remain in operation.
d.Factory overhead rate
TYPICAL ALLOCATION BASES FOR COMMON COSTS
Est.factory overhead
Most common costs can be grouped into four:
Est.direct labor cost
1.Labor-related common costs
P 450,000 x 100
2.Machine-related common costs
P 300,000
All
P 150%of direct labor cost
3.Space-related common costs
e.Factory overhead rate
rhead
Est.factory overhead
when
Est.direct labor hours
4.Service-related common costs
P 450,000
being
100,000 direct labor hours
arged
P 4.50/direct labor hour
Common costs should be analyzed carefully to determine the most appropriate
The rates computed above are known as the plant-wide or blanket rate.All
rhead
departments in the company will use the same application rate for factory
overhead allocation base.The typical allocation bases for common costs are shown
below
and also the same base.A single plant wide factory application rate can be
used when either
either a single product is being manufactured or when the different products they
being COMMON COST
manufactured pass through the same series of productive departments and are TYPICAL ALLOCATION BASE
charged f the
similar amounts of applied factory overhead.Multiple departmental factory Labor-related
overhead
1.
application rates are preferable when the different products being
manufactured either Supervision

do not pass through the same series of productive departments or,if they No.of employees,payroll amount of DLHrs
do,they 2
should be charged dissimilar amounts of applied factory overhead because of Personnel services
the Number of employees
differing amounts of attention each product receives. AD
STEPS IN COMPUTATION OF DEPARTMENTALIZED OVERHEAD Machine-related
RATE 3.Insurance on equipment
1.Divide the company into segments,called departments,cost centers,to which Value of equipment
expenses are charged. 4.Taxes on equipment
2.Estimate the factory overhead for each department(direct departmental Value of equipment
charges+
hich
indirect departmental charges).
5.Equipment depreciation
3.Select and estimate the base to be used by each department.
Machine-hours.equipment value
4.Allocate the service department costs to the producing departments.
6.Equipment maintenance
5.Compute the factory overhead rate(similar to computation using blanket
Number of machines,machine hours
rate).
Space-related
es+
Page 15
7.Building rental
Chapter8 Accounting for Factory Overhead
Space occupied
nting
0
223
Building insurance
In a departmentalized company,factory overhead should be budgeted for each
Space occupied
department.The procedures for distributing the budgeted departmental
expenses are 9.
identical to those used to allocate the actual factory overhead expenses.Prior Heat& air-conditioning
to the Space occupied,volume occupied
computation of the departmentalized factory overhead rate,management must 10.Concession rental
make
Space occupied&desirability of location
sure that the service department costs have been allocated to the producing
11.Interior bldg.maintenance
departments.,Departmentalized overhead rates are for the producing
Space occupied
departments
only.Producing departments,which include the production lines,are the cost-
Page 16
accumulation centers in which work is performed directly on the goods being
C
224 direct labor hours.In computing predetermined overhead rates,machine hours
Cost Accounting are
Service-related used as the base in Molding and direct labor hours as the base in Decorating.
3 Bldgs.&
12.Material handling Factory
Quantity or value of materials Molding
13.Billing and accounting Decorating
Number of documents Grounds
14.Indirect materials Adm.
Value of direct materials hod
METHODS OF ALLOCATING SERVICE DEPARTMENT COST TO Budgeted FO
PRODUCING DEPARTMENTS P400,000
1.Direct method-the most widely used method.This method ignores any P600,000
service P80,000
rendered by one service department to another,it allocates each service P120,000
department's total cost directly to the producing departments. nts
Service Department Direct labor hours
Producing Departrient 200.000
抑 100,000
H The
us Floor area
卫 100,000
us 60,000
2.Step method-sometimes called sequential method of allocation.This method 2,000
B 4,000
recognizes services rendered by service departments to other service test
departments Machine hours
D 200,000
and is more complicated because it requires a sequence of allocation.The 100,000
sequence typically starts with the department that renders service to the ers
greatest
Requirements:Allocate the cost of the service departments using:
number of other service departments and ends with the department that
t's
renders
1.Direct method
service to the least number of other departments.Once a service department's
Step method-start with Bldgs.&Grounds
costs are allocated,no subsequent service department costs are allocated to it.
3.Algebraic method
Service Department
SOLUTION TO ILLUSTRATIVE PROBLEM
Producing Department
1.Direct method
5N
B&G
EMR
FA
EX
Molding
Decorating
Page 17
Budgeted FO
Chepter 8 Accounting for Factory Overhead
P400,000
225
P600,000
ing
P80,000
3.Algebraic method-sometimes called reciprocal method.This method
allocates P120,000
costs by explicitly including the mutual services rendered among all Allocated FO
departments. B&G
Service Department 50,000
Producing Department 30,000
TO （80.000)
vice FA
vice （120.000)
ILLUSTRATIVE PROBLEM 2 80.000
Kappa Gamma Company's factory is divided into four departments-producing 40.000
departments;Molding and Decorating,serviced by the Buildings and Grounds Total FO
and the
P530.000
Factory Administration departments.Buildings and Grounds cost will be
P670.000
allocated
Base
using square feet(floor area)and Factory Administration cost will be allocated
using 200.000 MUcs
100.000DLHrs.
FO Rate x 80,000
P265/MHr. 164
P6.70/DLHr. x 80,000
CA
Page 18 FA
226 164
Cost Accounting In t
Allocation of B & G cost 3.Algebraic method
Molding be
100 x 80,000 Additional information for the illustrative problem:
160 Services provided by
Decorating be a
60 B&G
x 80,000 FA
160 50%
Allocation of FA cost 40%
Molding Molding
200 x 120,000 30%
300 50%
Decorating Decorating
100 10%
x 120,000 B&G
300 20%
2. FA
Step method Algebraic equation:
Molding B&G
Decorating 80,000+10%(FA)
B&G FA
FA 120,000+20%(BG)
The
Budgeted FO Page 19
P400,000 dupter 8 Accounting for Factory Overhead
P600,000 227
P80,000 nting
P120,000 Substitution:
Allocated FO B&G
B&G 80,000+10%(120,000+.20BG)
48,781 80,000+12,000+.02BG
29,268 98BG
（80.000) 92,000
1,951 BG
FA 92,000
81,301 98
40,650 93,878
（121.951) FA
Total FO 120,000+20%(BG)
P530,082 120,000+20%(93,878)
P669,918 138,776
Base ，000
200.000 MHrs. The allocation will be as follows:
100.000 DLHrs. Molding
FO Rate Decorating
P2.65/MHrs. B&G
P6.70/DLHr. FA
Allocation of B&G cost ，951
Molding Budgeted FO
100 P400,000
x 80,000 P600,000
164 P80,000
09 P120,000
Decorating 951
Allocated FO general and subsidiary ledgers.Subsidiary ledgers permnit a greater degree of
B&G control
46,939 overhead factory overhead costs as related accounts can be grouped together
and the
28,163
various expenses incurred by different departments can be described in detail.
（93,878)
Computation of overhead chargeable to individual cost sheets-(factory
18,776
overhead applied)
FA
After the factory overhead application rate has been determined,it is used to
55,510 apply (or
69,388 match)estimated factory overhead costs to production.The estimated factory
13.878 overhead costs are applied to production on an on-going basis as goods are
（138,776) manufactured,according to the base used (ie.,asa percentage of direct material
Total FO costs
P502,449 or direct labor cost or on the basis of direet labor hours,machine hours,or units
P697.551 produced).Applied factory overhead cae be computed by multiplying the
Base actual
200,000 MHrs factor incurred per cost sheet x predetermined overhead rate.
100,000 DLHrs..
FO rate Page 21
P2.51/MHr. Chapter 8 Accounting for Factory Overhead
P6.98/DLHr. 229
CAPACITY PRODUCTION nting
i the estimation of manufacturing overhead,as well as the estimation of the nce for
base to Eaty to charge production with applied overhead:
e used for allocation,it is important to determine what capacity of production Work in process-overhead
should XXX
be adopted. Factory overhead applied
a.Theoretical,maximum or ideal capacity-a capacity to produce at full XXX
speed without interruptions.It gives no allowance for human capacity to t range
achieve the maximum nor due allowance for any circumstances that might onal or
result to a stoppage of production within or not within the control of ding to
management.At this capacity level,the plant is assumed to function 24 hours Factory overhead variance-the difference between the actual factory overhead
a day,7 days a week,and 52 weeks a year without any interruptions in order as
to yield the highest physical output possible. shown by factory overhead control account and the overhead charged to
production as
Page 20 on the
228 shown by the factory overhead applied account.
Cost Accounting over a
b.Practical capacity-a capacity of production that provides allowance for e with
circumstances that might result to stoppage of production. Clssification of manufacturing overhead variance
C. in the
Expected actual capacity-a capacity concept based on a short range a.Underapplied overhead-the difference between actual overhead and
outlook which is feasible only for firms whose products are seasonal or applied overhead when the actual is more than the applied.
Where the market and style changes allow price adjustments according to pense
competitive conditions and customer demands. b.Overapplied overhead-the difference between actua!overhead and applied
d. Int are
Normal capacity-a capacity of production taking into consideration the overhead when the actual is less than the applied.
utilization of the plant facilities to meet commercial demands served over a Causes of the manufacturing overhead variance:
period long enough to level out the peaks and valleys which come with in the
seasonal and cyclical variations.This capacity is commonly used in the a.Spending variance-the variance due to expense factors.
computations of overhead rates. ledger
METHOD OF ACCUMULATION OF FACTORY OVERHEAD COSTS b.Idle capacity or volume variance-the variance due to difference in volume
1.Non-controlling account system-an account for each kind of overhead and activity factors.
expense n the
according to their nature is opened in the ledger and charges to such account ontrol
are Computation of manufacturing overhead variance
made upon incurrence of the expense. d the
2.Controlling account system-an Overhead Control account is opened in the a.Spending variance
general ledger wherein the overhead-incurred are charged and a subsidiary XXX
ledger
Actual factory overhead incurred
is maintained to show in detail the nature and account of the expense.
Less:Budget allowed based on capacity used
Actual overhead costs are usually incurred daily and recorded periodically in
the 广 aa
Fixed factory overhead pro
Variable factory oerhead Spending variance:
ly (or ma
Spending variance Actual factory overhead
COU P350,000
b.Idle capacity variance In
are Budget allowed on actual hours
XX Fixed
Budget allowed based on capacity used P200,000
costs dir
units Variable
Less:Factory overhead applied 110,000
ctual 310.000
Idle capacityvariance rep
Spending variance-unfavorable
Page 22 40.000
Cha b
230 A
Cost Accounting Idle capacity variance:
To UI S
Accounting for overhead variance Budget allowed on actual hours
prepa P310,000
4.During the period prior to the closing of the books,the overhead variance is Applied factory OH(110,000x P3.00)
not 330.000
mecognized in the 'account and the actual factory overhead account as well as 08
the
Je
applied factory overhead accounts are kept open.When interim financial
Idle capacity variance-favorable
statements are prepared and the variance is expected to be absorbed prior to
year- P(20.000)

end,such variance should be deferred rather than disposed of immediately. 8

b.At the end of the accounting period

1.If the amount of the overhead variance is immaterial or it is established to Page 23
be Chapter 8 Accounting for Factory Overhead
the result of inefficiency,it is closed to cost of goods sold. 231
2.If the amount of the overhead variance is material and found to be the result ing
of an erroneous computation of the predetermined overhead rate,such fo understand fiully the computation of the variance,the following table may
variance is distributed to the cost of goods sold,finished goods inventory, be

and the work in process inventory. paredald

AC is not

ILLUSTRATIVE PROBLEM 3 Total

The Per Hour

The Davidson Corporation made the following data available from its s the
accounting Fixed overhead
pro P 200,000
records and reports. P 2.00
com ncial
Budgeted factory overhead Variable overhead
P300,000 100.000
com 1.00
Budgeted direct labor hours year-
100,000 hrs. Total
bus P 300.000
Variable factory overhead rate P3.00
P 1.00/DLHr. Factory overhead rate
Actual factory overhead 300,000
P350,000 100,000 hrs.
hav to be
art P 3.00/DLHr.
Actual direct labor hours used result
110,000 hrs. Variable overhead cost
COs 100,000 Hrs.x P 1.00
Solution: such
P 100,000 applied to
tory, Activy- oting simple concept which can provide accurate information
ACTIVITY BASED COSTING directly t
The growth in the automation of manufacturing has brought many challenges ABC is an
to be assign
nting about a particular product's consumption of overhead resources.
product costing. involved.
Increased use of robotics,specialized machinery,and other approximation of a user's fee.A user's fee refers to the process of charging for
computer-driven processes has changed the nature of manufacturing and the services consumed by users of the service.ABC is based on the premise that if
composition of total product cost.In many highly-automated manufacturing a
businesses the significance.of direct labor cost has diminished and overhead product consumes many resources(activities)that comprise overhead.it should
costs bear a
have increased.The cost of acquiring installing,maintaining,and operating Select th
state-of- greater share of overhead costs than other product that does not consume as
ant manufacturing technologies has greatly increased overhead costs.In any
addition, The cost
costs that used to be classified as indirect such as quality control,computer activity units.In other words,activity costing is also like riding the LRT,the
pogramming,trouble shooting,and middle level management costs have more
become needed
major components of total production cost. you ride,the more cards you need to buy.
highly automated manufacturing environments,overhead application rates However
based on
of costs i
dneet labor may not provide accurate overhead charges because they no
longer FIVE BASIC STEPS IN APPLYING ABC

resent cause and effect relationship between output and overhead costs.The 1.Assemble similar actions into activity centers
need Calculat
lr more representative overhead application bases has led to activity-based 2
cosong Classify costs by activity center and by type of expense
WBC)which is also known as transaction costing.Those A cost fu
activities(transactionse
3
lat consume ov erhead resou rcees are identified and related to the costs
Select cost drivers
incurred.Th
cost driv
Watie premise in aetiv irss bused costing is that overhead costs that are causee
b Compute a cost function to associate costs and cost-drivers with resource use
avities are traced o individual produet units on the basis of frequency of 4.
onsumption of overhead resources by each produet. departm
5.
Page 24 Assign cost to the cost objective
Chapte center is
Cost Accounting be P50 P
232 Assemble similar activities into activity centers
batches bu Assign
Traditional overhead is applied to production using one of the application There are several number of actions performed in any organization so it will
bases which be
processing The last
were have previously discussed such as direct labor hours,machine difficult to relate to the cost of every action to a cost driver and then to the
hours,direct labor product.
needed to by multi
cost direct material cost and units of production.Direct labor hours,direct labor Therefore,it will be best to combine actions inte activity centers.One way of
e cost driv
productio grouping actions is to classify themn with different levels of
bosts,machine hours,machine hours,or units produced are volume based activities:namely,unit-
application level activities,batch-level activities,product-level activities,and facilities-
level acti level
bases.Volume-based production means that the more units estimated to be hours x
produced, activities.Unit-level activities are performed cach time a unit is
the larger the denominator in the equation used to determine the overhead produced.Example-
rate,thus assembly,stamping,and machining,Costs of these activities vary with the
Examples muember of
the smaller the overhead application rate and it follows that the amount of We
overhead hov
Classify units produced.Batch-level activities afe Pesformed each time a batch of
assigned to each unit will be lesser so overhead will be underapplied which is allocati
Assign c anits is produced.The costs of these activities vary according to the nunber of
unfavorable. three pr
setups, by multiplying the rate determined in the preceding paragraph by the actual
data or the
Page 25 09
nting n dtrive. actual setup hours used is 40,then the allocated cost will be
P2,000(40
Chapter 8 Accounting for Factory Overhead
hours x P50).
233
unit-
which
evel
batches but remain fixed for all units in the batch.Examples-machine set-
ups,order le-
t labor e now illustrate ABC by comparing it to one of the volume-basedn overheas
processing,and materials handling.Product-level activities are those performed er of
as ication procedures,namely dineet labor hours.For instance,NDLComoanc ine
t labor ai
needed to support the production of each different type of product.Examples- of
ication Ihe products,namely. c,p,and Ee and thr ee related overhead activities
produect-line
production scheduling,product designing,and parts and products
testing.Facility- O9
duced, Welups,number of handles and mumber of parts.The number of setups refer to
level activities are those which sustain a facility's general manufacturing
process. Page 26
，thus 234
Examples-plant supervision,building occupancy,and personnel administration. Cost Accounting
erhead the number of times each product'line is readied for production.The number of
ich is aaodles refers to the number of times each product is moved from one work
Classify costs by activity center and by type of expense. station to
Assign costs to the activity centers where they are accumulated while waiting another.The number of parts refers to the number of parts that is used in
to be making each
applied to products.Costs that are traceable to the activity center should be product.The production,overhead activities and their corresponding costs are
assigned shown
nation on the table below:
directly to activity centers.Other costs shared by two or more activity centers Units
should Total
is an Total DL
be assigned according to some cost driver that controls the utilization of the Total
costs No.of
g for Times
involved. No.of
t if a Product
ear a Produced
Select the cost drivers DM Cost
s any Setups
The cost drivers are the links between cost,activity,and product.Cost drivers Handled
are not
Parts
more
DL Hrs
needed for direct costs because these can be traced immediately to a product,
Cost
However,indirect costs such as factory overhead need links or drivers to link a
pool 20

of costs in an activity center to the product. 30

Calculate a cost function P 300

A cost function is used to translate the pool of costs and cost driver data into a P 600
rate per D
cost driver unit or a percentage of other cost amounts,just like the plant-wide 100
or 150
use 1,500
departmentalized factory overhead rate.For example,if the costs of the setup 3,000
activity
七
center is P25,000 and the selected cost driver is 500 hours,then the cost 3,000
function will
E
be P50 per setup hour(P25,000/500 hours).
100
Assign cost to the cost objective
70
／8
700
the last step is to allocate the costs to the different users of the resouree.This is
done Budgeted cost of each cost driver

duct. Setups
P 6,200 222
Times handled
3,300 Page 27
No of parts Chapter 8 Accounting for Factory Overhead
3.000 235
Total budged overhead cost a0
P 12.500 Under activity-based costing the factory overhead rate is determined by
The overhead application rate using direct labor hours,as base,would be dividing the
computed as of
Factory overhead rate otal costs of each overhead activity by the total frequency for each activity.
P 12,500/250 direct labor hours to
P 50.00 per direct labor hour （P6,200/8)
Using direct labor hours as the base,factory overhead will be applied to the ＝P 775.00 per setup
three ch
products as follows: Setup
Product 550.00 per handling
Total Overhead Applied Handling(P3,300/6)
No.of Units UM
OHCost/unit No.of parts(P3,000/5)
30 hrs. x P50 600.00 per part
＝P The full cost per unit of each product will be determined as follows:
1,500 of
20 Product C
P 75 Product D
7,500 Product E
100 ts
75 Direct materials
D P 600
150 hrs.xP50 P 3,000
70 hrs.x P50 P 3,000
3,500 Direct labor
100 300
E 1,500
35 700
The applied factor overhead when combined with the prime cost of each Factory overhead
product will
3,250
show the following
5.400
Product C
3,850
Product D
Total cost
Product E
P4,150
Direct materials
P 9.900
P
P 7,550
600
Cost per unit
P 3,000
P207.60
P.3,000
P 99.00
Direct labor
P 75.50
300
The applied overhead cost of the products were determined as follows:
1,500
Product C
700
Setups
Factory overhead applied
2 at P 775.00
1,500
P1,550.00
7,500
as
3.500
Handling
Total cost
2 at P 550.00
P 2.400
1,100.00
P 12.000
No.of parts
P 7.200
1 at P 600.00
Cost per unit
600.00
P120/unit
Total overhead
P 120/unit
P3.250.00
P 72/unit
ree
Product D
Setups
4 at P 775.00
P3,100.00
Handling
2 at P 550.00
1,100.00
1it
No.of parts
2 at P 600.00
1,200.00
Total overhead
P5400.00
Product E
P1,550.00
Setups
2 at P 775,00
1,100.00
Handling
2 at P 550.00
vill
1,200.00
No.of parts
2 atP 600.00
P3.850.00
Total overhead
Uider the traditional method,direct labor does not explain the cause-emeet
ationship between the products and incurring of overhead costs.On the
tableabor o
an be seen that Prod Das the igest cost followedbyt a
liaes the lowest allocated overhead because.c consumes less overhead
activities a
Whe other two prodiuets.Byverneantrating on each produet's consumions fte
g
aa.component(overhead),activiny cosing avoids the problem of overstating
costs o
oduets that are low level consumers of overhead activities and understating
costs of
products that are high level consumers.