dinal factory overhead
TRANSCRIPT
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Factory OverheadFactory OverheadCosting and AccountingCosting and Accounting
Costing and Accounting for ProductCosting and Accounting for Product
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Factory Overhead
Presentation by
Khadijah Waseem
Roma Feroze
Sameena Abid
Samra Khan
Sadaf Siddique
Sundas Kanwal
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Topics to be discussed
Factory Overhead Rate
Plant-wide or Departmental Rates
Departmentalization of Factory Overhead
Selection of Factory Overhead Absorption
Base
Selection of capacity Level Variance Analysis
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Factory Overhead
The sum of all the indirect elements ofcost incurred to manufacture a product
Indirect material+
Indirect labour
+
Other indirect costs
=
Factory Overhead
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Factory Overhead
Also known as:
Factory burden
Manufacturing expense
Manufacturing overhead
Factory expense
Indirect manufacturing cost
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Factory Overhead
Indirect Materials
It is that material which does not form a part ofthe finished product
Examples are coal, lubricating oil, grease, sandpaper, etc
There are some items w
hich
may become apart of the finished products like nuts, screws,bolts etc, but these are still considered indirectmaterials
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Factory Overhead Indirect labour
It is not directly engaged in theproduction operations
They only assist in production operations
Examples are supervisors wages, salary
to clerks, salary to inspectors, peons,watchmen, janitors etc
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Factory Overhead Indirect Costs
All indirect costs, other than indirect materialsand indirect labour, are considered
Indirect expenses like rent, depreciation,lighting, normal spoilage, property taxes,insurance etc
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Computation of the predeterminedfactory overhead rate
FOH rate =
Budgeted total factory overhead .
Budgeted volume of application base
Overhead rates are budgeted; they areOverhead rates are budgeted; they are
estimates. The budgeted rates are used toestimates. The budgeted rates are used to
apply overhead based on actual eventsapply overhead based on actual events
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Factors consideredBase To Be Used
Physical Output - [estimated Factory OH / PO]
Direct materials cost - [estimated Factory OH / DMC]
Direct labor cost - [estimated Factory OH / DLC]
Direct labor hours - [estimated Factory OH / DLH]
Machine hours - [estimated Factory OH / MH]
Activity Level to Use Expected capacity
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The result is the Overhead Absorption Rate
Divide the estimated overhead by the base
Identify the estimated overhead and baseIdentify the estimated overhead and base
Calculation of FOH Rate
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It would be easier to see it with figuresIt would be easier to see it with figures
So the overhead rate would be Rs. 10/hSo the overhead rate would be Rs. 10/h
FOH rate = 10,000 = Rs.10 per labour hour1,000
If we have an overhead cost ofRs. 10,000 andan overhead base of1,000 labor hours, wewould divide 10,000 by 1,000 to get an overhead
absorption rate of Rs. 10 per labour hour
Example
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Plantwide Rate It means a single factory overheadabsorption rate established for entirefactory
Formula:
Total estimated FOH
Total Estimated Base
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Example
Plantwide Rate = 120,000 = Rs.2 per Hour
60,000
Dept 1 (Rs.) Dept 2 (Rs.) Dept 3(Rs.) Total
EstimatedFOH
20,000 40,000 60,000 120,000
EstimatedDLH
20,000 20,000 20,000 60,000
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Departmental Rate
It means a separate factory overhead
absorption rate for all departmentsthrough which the product passes
Formula =Estimated Departmental FOH
Estimated Base
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Example
Departmental Rate
For department 1 = 20,000 = Rs.1 per Hour
20,000
For department 2 = 40,000 = Rs.2 per Hour
20,000
For department 3 = 60,000 = Rs.3 per Hour
20,000
Dept 1 (Rs.) Dept 2 (Rs.) Dept 3 (Rs.) Total
EstimatedFOH
20,000 40,000 60,000 120,000
EstimatedDLH
20,000 20,000 20,000 60,000
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Product ZProduct ZProduct XProduct X
DepartmentB
DepartmentCDepartmentA
Product YProduct Y
Departmental RateDepartmental Rate
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DepartmentalizationIt is the process of determining the factory overhead cost
of each department involved in production
Production Departments
Production Departments
are directly involved inmanufacturing of productslike
o Cutting
o Stitchingo finishing and packing of
departments of agarment factory
Service Departments
Service Departments are
not directly involved inmanufacturing ofproducts but provideservices to supportoperations in productiondepartments like
o repair andmaintenance
o Purchasing
o storeroom etc
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Stages ofDepartmentalization
It involves the following two stages:
Stage 1Stage 1
Stage 2Stage 2
Allocation of Direct Departmental FOHAllocation of Direct Departmental FOH
Apportionment ofIndirect DepartmentalApportionment ofIndirect Departmental
FOHFOH
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Allocation of Direct Departmental FOH meansAllocation of Direct Departmental FOH means
to allocate items ofFOH to a particularto allocate items ofFOH to a particulardepartment by directly identifying themdepartment by directly identifying them
Departmental costs are directly allocated toDepartmental costs are directly allocated torelevant departmentsrelevant departments
It involves:It involves:
oo Indirect materialsIndirect materials
oo Overtime premiumsOvertime premiums
oo Depreciation of plant & machineryDepreciation of plant & mac
hinery
Allocation of Direct DepartmentalAllocation of Direct Departmental
FOHFOH
Stage 1Stage 1
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Apportionment of IndirectApportionment of IndirectDepartmental FOHDepartmental FOH
Here, the cost is distributedHere, the cost is distributedamong the departmentsamong the departmentsaccording to the estimatedaccording to the estimatedvalue of resources consumedvalue of resources consumedby each departmentby each department
Stage 2Stage 2
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Types of Secondary apportionment
ReciprocalReciprocalapportionmentapportionmentoo The secondaryThe secondary
apportionment in such aapportionment in such a
a way thata way thatinterdependence amonginterdependence amongservice departments isservice departments isrecognized while prorecognized while pro--rating the costsrating the costs
oo There are two methodsThere are two methodsemployed for reciprocalemployed for reciprocal
apportionmentapportionmenti.i. Repeated apportionmentRepeated apportionment
methodmethod
ii.ii. Algebraic methodAlgebraic method
NonNon--ReciprocalReciprocalapportionmentapportionment
The secondary apportionment inThe secondary apportionment in
such a a way that once cost of asuch a a way that once cost of aservice department has beenservice department has beenapportioned, cost of no otherapportioned, cost of no otherdepartment is the apportioned todepartment is the apportioned toitit
It has the following two forms:It has the following two forms:
i.i. Cost of service departmentsCost of service departments
are apportioned to serviceare apportioned to servicedepartments onlydepartments only
ii.ii. Cost of service departmentsCost of service departmentsare apportioned toare apportioned toproduction as well as serviceproduction as well as servicedepartmentsdepartments
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After preparing estimates of factory overhead forproduction departments, the next step is to select afactory overhead absorption base for each production
department
The most simple and direct measure of activity of amanufacturing concern is number of units produced
In process costing industries like sugar, cement etc.Kg. or a bag may be regarded as unit of output; abottler may use a bottle or a liter as a unit of output.
SELECTION OF FACTORY OVERHEADSELECTION OF FACTORY OVERHEADABSORPTION BASEABSORPTION BASE
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Example
In job costing industries each unit of output isquite different from the other.For example, a furniture manufacturer produces
o chairso tables
o beds and many other items, each according tospecifications of customers.
In such a situation because of the dissimilarities, aunit of output can neither be used to measure the activity
nor as base for factory overhead absorption.Therefore, some other common denominator
should be adopted to measure the activity and as base forapplying factory overhead to the products
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SELECTION OF FACTORY OVERHEADSELECTION OF FACTORY OVERHEADABSORPTION BASEABSORPTION BASE
DIRECT LABOUR COSTTotal amount required to pay workers and employees during aweek, month or other period
DIRECT LABOUR HOURSDirect labor hours worked by all mining employees at a mining
operation during the year. Includes hours worked by thoseemployees engaged in production, preparation, development,maintenance, repair, shop or yard work management, andtechnical or engineering work. Excludes office workers. Excludesvacation and leave hours
MACHINE HOURSOne machine working for one hour. In cost accounting, machinehour (and not the labor hour) is used for applying overheadcosts to work-in-process inventory in mechanized production
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SELECTION OF FACTORY OVERHEADSELECTION OF FACTORY OVERHEADABSORPTION BASEABSORPTION BASE
DIRECT MATERIAL COSTPart of raw material cost that can be specificallyand consistently associated with or assigned to
the manufacture of a product, a particular workorder, or provision of a service
PRIME COSTTotal of direct material costs and direct laborcosts
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Selection of Capacity Level
Capacity Level means ability to produce
Industries producing homogeneous products mayexpress their capacity level in terms ofunits ofproduction
To calculate estimated FOH, its necessay to select
an appropriate capacity level at which the cost andthe cost deriver should be estimated
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Types of Capacity Levels
Theoretical CapacityTheoretical Capacity
It is the maximum capacity level attained if there wereIt is the maximum capacity level attained if there were
100% utilization of time, which is impossible. It is the starting100% utilization of time, which is impossible. It is the startingpoint of measurement of practical capacitypoint of measurement of practical capacity
Practical CapacityPractical CapacityIt is the maximum activity level attained under efficientIt is the maximum activity level attained under efficient
working conditionsworking conditions
Expected Actual CapacityExpected Actual Capacity
IIt is the expected activity level to be attained during ant is t
he expected activity level to be attained during anaccounting yearaccounting year
Normal CapacityNormal Capacity
IIt is the average of the expected actual capacity over at is the average of the expected actual capacity over anumber of yearsnumber of years
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Variance Analysis
Variance is the difference between an actualVariance is the difference between an actualFOH and an expected FOHFOH and an expected FOH
The process by which the total differenceThe process by which the total differencebetween standard and actual results isbetween standard and actual results isanalyzed is known as variance analysisanalyzed is known as variance analysis
When actual results are better than the expectedWhen actual results are better than the expectedresults, we have a favorable variance (F).results, we have a favorable variance (F).
If, on the other hand, actual results areIf, on the other hand, actual results areworse than expected results, we have anworse than expected results, we have anadverse (A)adverse (A)
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Favourable/Unfavourable VarianceFavourable/Unfavourable Variance
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Budget VarianceBudget Variance
Flexible budgets are primarily designed to assistFlexible budgets are primarily designed to assist
planning and control rather than product costingplanning and control rather than product costing
Budget variances measure components ofBudget variances measure components of
the differences between actual amounts and thethe differences between actual amounts and the
flexibleflexible--budget amounts for the output achievedbudget amounts for the output achieved
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Remember that overhead absorption rateRemember that overhead absorption rate ==
Budgeted fixed productionOverheadBudgeted fixed productionOverheadBudgeted level of activityBudgeted level of activity
Capacity VarianceCapacity Variance
It is the difference between the capacity estimated orIt is the difference between the capacity estimated or
actually achievedactually achieved
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Got Questions?
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Thats all
Thanks!