ACCOUNTING FOR FACTORY OVERHEAD

PROBLEM

1. Kater Company manufactures shelving units. The company receives pre-cut wood, drills holes in the
wood so that movable shelves may be installed, then assembles and paint the units. Classify each of
the following items of factory overhead as either fixed or variable cost.

a. Janitorial service (an outside service, not company employees)

b. Supervisor of the Drilling Department

c. Oil used to lubricate drill press machines

d. Propane for forklift trucks used to move the material from the Drilling Department to the Assembly
Department

e. Natural gas used to heat the plant

f. Security guard

g. Drill bits used in the drilling department

h. Insurance on factory building

i. Electricity to power drill press machines

j. Rent of factory building

2. Santorini Ltd. has accumulated the following data over a six-month period:

Indirect Labor Indirect Labor

Hours Cost
January 500 P 9,500
February 400 9,000
March 600 10,000
April 800 12,000
May 700 11,000
June 650 10,500

Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels
of production using the high-low method.

3. The following are the results of the least squares regression method which was run to separate the
fixed and variable components of the Zulli Corporation’s monthly factory utility costs using the
number of products produced:

y = 49,222.2992 + 5.09 x
R2 = .97765
 a) Assume Zulli budgets production of 5,400 units in June, what should budgeted utility costs be?
b) Explain what R2 means. Is this equation a good predictor of utility costs?

4. Kristoff Ltd. has accumulated the following data for the year regarding its factory overhead costs:

Units Factory
Produced Overhead
January 2,900 P38,000
February 3,100 40,000
March 3,000 39,000
April 3,400 46,000
May 2,500 34,000
June 2,900 40,000
July 3,300 44,000
August 2,700 36,000
September 3,200 41,000
October 3,000 37,000
November 3,500 45,000
December 3,300 42,000

a. Using the least squares regression method and Microsoft Excel, determine the variable and fixed
cost elements (SLOPE and INTERCEPT) and the RSQ.
b. What does the RSQ mean in this case.
c. Use the results to prepare a flexible budget at volumes of 2,800; 3,000 and 3,200 units. Round to
the nearest peso.

5. Daisy Drink Company has the following budget at 500,000 cases of cola:

Direct materials P180,000

Direct labor 160,000
Variable factory overhead 150,000
Fixed factory overhead 130,000
P620,000

(1) Compute the cost per case of cola at 500,000 cases.

(2) Develop the budget for 550,000 cases.
(3) Compute the cost per case at 550,000 dozen.
(4) Explain why the difference in the cost per dozen occurs at the different levels of volume.

6. Dean Corporation has two service departments, Power and Maintenance, and two production
departments, Painting and Polishing. The following data have been estimated for next year’s
operations:
Department: Direct Charges Kilowatt Hours Used Square Footage
Power P450,000 20,000 10,000
Maintenance 120,000 50,000 5,000
Painting 235,000 100,000 30,000
Polishing 265,000 150,000 20,000

Requirements:
(1) Identify which service department would you use kilowatt hours to allocate service costs, and
which you would use square footage to allocate service costs.
 (2) Distribute the service department costs using the direct distribution method.
(3) Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.

7. Bradford Company has two service departments, Human Resources and Janitorial, and two production
departments, Cutting and Glazing. The following data have been estimated for next year’s operations:
Department: Direct Charges Number of Employees Square Footage
Human Resources P360,000 6 15,000
Janitorial 280,000 8 20,000
Cutting 428,000 42 25,000
Glazing 562,000 40 35,000

Requirements:
(1) Distribute the service department costs using the sequential distribution method. Distribute the
Human Resources Department first.
(2)Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.

8. Perry Company has two service departments, Maintenance and Human Resources, and two production
departments, Machining and Assembly. The following data have been estimated for next year’s
operations:
Department: Direct Charges Square Footage Labor Hours
Human Resources P135,000 -- --
Maintenance 100,000 -- 5,000
Machining 275,000 2,000 20,000
Assembly 225,000 3,000 25,000

The Human Resources Department services all departments.

Requirements:
(1) Distribute the service department costs using the direct distribution method.
(2) Distribute the service department costs using the sequential distribution method with the
department servicing the greatest number of other departments being distributed first.
(3) Using the results from the direct distribution method, calculate the predetermined factory overhead
rate for the machining department using labor hours as the basis.

9. 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 P400,000
   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
P1,190,000

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

b. Prepare a schedule showing the prime cost and total cost of Order 329 with the factory
overhead costs applied on each of the three bases; Job Cost Sheet 329 shows the following:
raw materials, P6,200; direct labor, 6,000 hours and P29,000; machine hours, 2,800.

10. Lynch Audio produces stereo components for a major automotive stereo manufacturer. It currently
uses the machine hour method of applying factory overhead to production. Information for the
previous year follows:

Budgeted amounts Actual amounts

Factory overhead P3,000,000 P3,050,000
Direct labor hours @ $10 per hour 250,000 248,000
Machine hours 750,000 735,000

During the year, Lynch produced a new product, Super Tweeters, which involved P27,000 of material,
3,100 direct labor hours and 4,500 machine hours.

a. Compute the predetermined factory overhead rate.

b. Compute the amount of under- or overapplied factory overhead.
c. Determine the cost of the Super Tweeter job.

11. Factory overhead for the Praeger Company has been estimated as follows:

    Fixed overhead P122,500

    Variable overhead P90,000

    Budgeted direct labor hours 42,500

Production for the month was 90 percent of the budget, and actual factory overhead totaled P175,000.

Calculate:
a. The predetermined factory overhead rate.
b. The under- or overapplied factory overhead.

12. The controller has asked you to 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 84,000
Machine hours 120,000

Manufacturing costs:
   Direct labor P525,000
   Direct materials 180,000
   Indirect labor 75,000
   Electric power 48,000
   Payroll taxes 12,600
   Machine maintenance and repair 9,200
   Factory supplies 16,000
   Factory heat and light 14,000
   Depreciation, taxes, and insurance:
      Factory buildings 135,000
      Machinery    320,200
P1,335,000

Actual results for the year follow:

Direct labor hours 85,000
Machine hours 110,000

Manufacturing costs:
Direct labor P 540,000
Direct material 200,000
Factory overhead 625,000
P1,365,000

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

b. Determine the under- or overapplied factory overhead under each of the following
methods:
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours

13. Hansen Company uses activity-based costing. The factory overhead budget for the coming period is
P1,053,000, consisting of the following:

Cost Pool Budgeted Amount

Supervision P  320,000
Machine usage    420,000
Machine setups    187,000
Design changes    126,000
Totals P1,053,000

The potential allocation bases and their estimated amounts were as follows:
 Allocation Base Budgeted Amount
Number of design changes     35
Number of setups    110
Machine hours  6,000
Direct labor hours 10,000

a. Determine the overhead rate for each cost pool, using the most appropriate allocation
base for each pool.
b. Job 80130 required P45,000 for direct materials, P20,000 for direct labor, 2,000
direct labor hours, 800 machine hours, five setups, and four design changes.
Determine the cost of Job 80130.
c. Determine the cost of Job 80130 if Hansen used the direct labor hour method of
applying overhead.
d. What is the reason behind the difference in the costs of the job using Activities-based
costing vs. the direct labor hour method of applying overhead?

14. Estimates made for a production department of the Automate Company for the month of October
show:

   Budgeted factory overhead for hours worked P17,360

   Estimated direct labor hours 3,100

Factory overhead is applied on the basis of direct labor hours. On October 31, the records show these
actual figures:

   Actual overhead incurred P18,625

Direct labor hours worked 3,425

Prepare the entry or entries to 1) apply factory overhead to production; 2) record actual factory
overhead incurred assuming all items were purchased from vendors; 3) close out the two factory
overhead account balances to set up the overapplied or underapplied factory overhead; and 4) to close
the balance in under- or overapplied factory overhead to Cost of Goods Sold.