HAMDARD UNIVERSITY HAMDARD UNIVERSITY FACTORY OVERHEADFACTORY OVERHEAD

CHAPTER # 9, 10CHAPTER # 9, 10

PRESENTED BY:PRESENTED BY:

ABDUL RAHIM SURIYAABDUL RAHIM SURIYA

Factory Overhead is defined as• All factory expenses that can not conveniently

be identified with nor charged directly to specific jobs or products.

• Other terms used for FOH:Manufacturing expenses or Factory expensesManufacturing overheads or Indirect manufacturing cost.

• Factory overhead is an invisible part of the finished product.

• Fixed & variable overheads cost relationship to volume. (see graph at page # 205)

FACTORY OVERHEAD-FACTORY OVERHEAD-PREDETERMINED OR APPLIED FOH PREDETERMINED OR APPLIED FOH

RATERATE• Practically it is not easy to work out FOH

portion for a product cost.• FOH is usually charged to product on an

estimate basis so that promptly cost of product is known to management.

• A predetermined overhead rate serve management need and avoid month to month fluctuation in unit cost due to variation in volume.

• FOH may be allocated using base such as:

Actual labor cost

Direct material cost

Direct labor hours

Unit produced

Machine hours or

Some other base

• Factors to be considered to selection of FOH rates (please see page#207)

•ACCOUNTING FOR FOHACCOUNTING FOR FOH

TRANSACTIONSa) When company incurs

expenses

b) Transfer to FOH a/c

c) FOH charged to production

d) To close applied FOH A/c

ENTRY• Various expenses DR

Cash or A/P CR

• FOH control a/c DR Various expenses CR

• Work in process DR Applied FOH CR

• Applied FOH A/C DR FOH control A/C CR

FOHFOH

Actual 100 Applied 90 10/= is underapplied FOH

Actual 100 Applied 105 5/= is

overapplied FOH

• Usually FOH actual expenses & applied FOH are not equal ,therefore FOH control a/c will have either Debit or Credit balance after entry.

• A Debit balance indicates that FOH has been

underapplied; a Credit balance means that overhead has been overapplied.

• In short Debit to FOH control account is for actual expenses incurred during the period while Credits are for applied FOH.

• In either case ,the difference must be analyzed to determine the reasons for the over or underapplied factory overhead.

VARIANCE ANALYSISVARIANCE ANALYSIS

To know the reasons for difference in actual vs. applied FOH,two variances are computed

1) Spending Variance

2) Idle capacity Variance

FACTORY FACTORY OVERHEAD:DEPARTMENTALIZATIONOVERHEAD:DEPARTMENTALIZATION

CHAPTER # 10• Departmentalization of factory overhead means

dividing the plant into segments called departments, cost centre, or cost pools to which expenses are changed.

• Dividing a plant into separate cost centers provide more accurate costing of products as different overhead rates are applied.

• All production cost centers in addition to direct cost must bear an equitable shares of service departments cost.

•Examples of Producing & Service Examples of Producing & Service Department Department

PRODUCING• Mixing• Granulation• Lubrication• Compression/ Tableting• Coating• Blistering / Container• Cartoning• Packaging

SERVICES• Material handling/

purchasing• Inspection• Storage• Security / Cleaning• Canteen• Transportation

•Allocation of indirect departmental expenses Allocation of indirect departmental expenses Distribution BasesDistribution Bases

* Factory rent, property tax, Area building depreciation, covered insurance

• Light, Gas, Power Actual consumption as per meter

FOH FOH Practice MaterialPractice MaterialApplied FOHApplied FOH

1. Discussion Question # 4, 5, 12, and 18 at page 227/ 228 chapter no. 9

2. Problem # 9-4 ,9-5,9-7 at page # 233

3 .Exercise # 5,6 . Page # 260- 261

4. Case # C & D

at page 272

DISTRIBUTION OF FOHDISTRIBUTION OF FOH