Question

1.You have been hired by Thompson Waterfall Manufacturing. Your first task is examine
different distribution methods for applying factory overhead to the various production
orders that are processed during a year.

The following information was taken from the annual budget:

Direct labor hours	80,000
Machine hours	160,000
Manufacturing costs:
Direct labor	$400,000
Direct materials	190,000
Indirect labor	65,000
Electric power	46,000
Payroll taxes	12,800
Machine maintenance and repair	10,200
Factory supplies	17,000
Factory heat and light	15,000
Depreciation, taxes, and insurance:
Factory buildings	124,000
Machinery	310,000
	$1,190,000

Required:
a.Determine the following factory overhead application rates under each of the following methods:
(1) Direct labor cost  
(2) Direct labor hours
(3) Machine hours

b. What are the uses of FOH application rates? Explain

Answer 1

Answer a). Factory overhead cost :-

Given, indirect labor $65000

Electric power 46000

Payroll taxes. 12800

Machine maintenance

and repair. 10200

Factory supplies. 17000

Factory heat and light. 15000

Depreciation taxes and insurance

Factory building. 124000

Machinery 310000

Total. 600000

1).Direct labour cost= Factory overhead cost / Direct labour cost

= 600000/400000

=150% it is multiplied by 100 because of %

2).Direct labour hour = Factory overhead cost / direct labour hour

= 600000/80000

= $ 7.5/ hours

3). Machine hours= Factory overhead cost/ Machine hours

= 600000/160000

=$3.75/hours

B). The factory overhead cost refers to the cost to accumulate the all indirect manufacturing cost ( excluding selling, general ,and administration expenses because they are non manufacturing cost)Examples of factory overhead cost are:-

Indirect labor, electric power,payroll taxes,Machines maintenance and repairs,factory supplies,factory supplies,factory heat and light, factory building ,machinery,property tax on factory building etc.

These are divided into three categories:-

1).variable overhead cost :-it means the total variable cost vary in direct proportion to the level of production within the relevant range example of this are indirect material and indirect labor

2).fixed overhead cost:- it will be constant within the relevant range example Depreciation and rent on the Factory building

3).mixed overhead cost :-it will neither be fixed and not be a variable in nature but have characteristics of both

There must be a Direct relationship between the base and Factory overhead costs.

The rates are generally stated in terms of dollars, hours and per units .

IT are used for computing the direct labor cost, direct material cost, direct labor hours, units of production, machine hours.

1. Units of production:- the unit produced is readily available for applying factory overhead.

Formula for units of production:-

Estimated factory overhead / units of production it will give the per unit of production cost

2. Direct material cost:- it determine the direct relationship between the direct material and Factory overhead cost.

Formula for direct material cost :- estimated factory overhead/ direct material cost it gives the direct material cost

3. Direct labor cost:- closely related to factory overhead cost and payroll Data .

Formula for direct labor cost:- estimated factory overhead / direct labor cost it gives the direct labour cost

4. Direct labor hours :- it is a direct relationship between the factory overhead and direct labour hours

Formula for direct labour hours

Estimated factory overhead / direct labor hours it gives the rate Direct labor hours

5.Machine hours :-the time required for Machine to perform similar operations in computing The factory overhead rates

Formula for Machine hours

Estimated factory overhead/machine hours

It gives the rate in machine hours