Chapter 7: Accounting for factory overhead

Problem 6
The ABC Company has two service departments and two producing departments
Service Departments to costs:

Department 1 Repair P 14,000

Department 2 cafeteria 11,000
Producing Departments Factory OH Costs

Department A Machinery 52,500

Department B Assembly 48,000
Additional Information

Department Square Feet Est. Direct Labor hours

Repair 1,500 3,500

Cafeteria 1,800 1,200
Machinery 2,000 2,300
Assembly 3,000 1,700
Total 8,300 8,700
The cost of the Repair Department are allocated on the basis of square feet.
The costs of the cafeteria Department are allocated on the basis of estimated direct labor hours. The
producing departments use estimated direct labor hours: 1,500 in Department A and 1,250 in
Department B.
Required: Allocate the total costs of the service departments to the producing departments
(compute the departments factory rate) by using the folloing:
1. Direct method
2. Step method - start with the repair Department

Problem 7
Central Parkway Corp. has two producing and two service departments labeled P1 , P2 , S1 ,
S2, respectively. Direct cost for each department and the portion of service costs used by the various
departments are as follows:
Cost Direct Proportion of service used by:
Center Costs S1 S2 p1 P2
P1 P 120,000
P2 80,000
S1 25,000 - .25 .50 .25
S2 10,000 .10 - .50 .40
Required: Allocate the service department cost using algebraic method.

Problem 8
Megastar Companys normal operating capacity is estimated at 95,000 machine hours per month. At
this operating level, fixed factory overhead is estimated to be P34,200 and variable factory overhead
is estimated to be P41,800. During November, the company operated 100,000 machine hours.
Actual factory overhead for the month totalled P78,600.
Required : Compute for the following
1. The over or under applied factory overhead.
2. The spending variance .
 3. The idle capacity variance.

Problem 9
normal annual capacity for Abner Company is 72,000 units, with fixed factory overhead budgeted at
P33,840 and an estimated variable factory overhead rate for P4.20 per unit. During October, actual
production was 5,400 units, with a total overhead of P15,910.
Required : Compute for the following
1. The applied factory overhead
2. The over or under applied factory overhead
3. The spending variance
4. The idle capacity variance

Problem 10
Norman Corporation uses a flexible budget system an prepared the following information for 2012.
Normal capacity Maximum capacity
Percentage of capacity 80% 100%
Direct labor hours 48,000 60,000
Total budgeted factory overhead P252,000 P270,000
Norman planned to operate at normal capacity but actually operated at 90% of maximum capacity
during 2012. The actual factory overhead for 2012 was P273,000.
Requirements :
1. Using HI-LO method, compute for the variable rate per hour.
2. Determine the fixed portion of the budgeted factory overhead.
3. Compute for the spending variance.
4. Compute for the idle capacity variance.

Problem 11
The strawberry Corporation has the following information relating to applied and actual
factory overhead.
Factory overhead control P30,500
Applied factory overhead 39,700
Applied factory overhead costs are in the following accounts.
Cost of goods sold P32,00
Ending work in process inventory 3,500
Ending finished goods inventory 4,200
Required :
a. Allocate the under or overapplied factory to those accounts distorted by using what turned
out to be an incorrect factory overhead application rate.
b. Prepare the end-of-period entries.

Problem 12
For many years Tinor Company has used a manufacturing overhead rate based on direct labor hours.
A new plant accountant has suggested that the company may be able to assign overhead costs to
products more accurately by using an activity-based costing system. The accountant explains that by
creating an overhead rate for each production activity that causes overhead costs, the resulting
product costs will reflect an accurate measure of overhead cost. The direct material cost is P120 per
unit. The budgeted hours is 8,030 direct labor hours. The accountant has identified activity centers
to which overhead costs are assigned. The cost pool amounts for these centers and their selected
activity drivers for 2012.
ACTIVITY CENTERS COSTS ACTIVITY DRIVERS
Materials handling P 60,000 1,200 times handled
Scheduling and setups 80,000 400 setups
Design section 10,750 100 changes
No. of parts 50,000 500 parts
P 200,750
The companys products and other operating statistics follow:
Qty. DLH DL No. of time No. of No. of No. of
Prod. Produced Used Cost Handled Parts Changes Setups
A 50 100 P6,000 20 6 3 5
B 100 300 18,000 40 10 5 7

Required :
1. Compute the unit cost for each product using direct labor hours as the overhead application
base.
2. Compute the unit costs for each product using activity-based costing.

TRUE-FALSE QUESTIONS
Indicate whether the following statements are true or false by inserting in the blank space provided,
a capital T for true or F for false.
1. Service departments are sometimes called indeterminate cost centers , while production
departments would be the final cost centers.
2. Service departments are production departments, such as assembly departments, that
manufactured goods.
3. One of the purposes of service department cost allocation is to value in inventory for
external financial reporting.
4. the direct method is a method of cost allocation that charges costs of service
departments to user departments and ignores any services used by other service departments.
5. Under, the step method of cost allocation, the final amount of pesos allocated to any
production department is influenced by the order in which the allocation is made from the service
departments.
6. If there are no inter-service department activities, then all three allocation methods will
give identical results.
7. When a plant-wide rate is used, this means that a single rate used to allocate overhead to
all departments in the company.
8. With the algebraic method, each departments costs are set out in an equation where
total costs equal the sum of direct costs and allocated costs.
9. Inter-service departments activities are fully ignored by both the direct and step methods
of cost allocation.
10. Overapplied overhead occurs when actual is less than applied OH.
11. The predetermined overhead rate is an amount obtained by dividing the total overhead
for the past period by the total overhead allocation base for the coming period.
12. When overapplied overhead is assigned to Cost of Goods Sold, the effect is to increase
the balance on the Cost of Goods Sold account.
13. The numerator reason refers to the overhead variance caused by the difference
between the estimated and actual OH costs for the period.
 14. If all manufacturing overhead costs were variable, the production volume variance
would always be zero.
15. The sum of the spending variance and the volume variance equals the total
manufacturing overhead variance.

MULTIPLE CHOICE
1. Manufacturing overhead applied was P120,000, while actl overhead incurred was P124,000.
Which of the following is always true of the above?
a. Direct labor activity was overestimated.
b. Overhead was overapplied by P4,000.
c. Overhead was underapplied by P4,000.
d. This difference must be reported as a loss for the period.
2. Depreciation based on the number of units produced would be classified as what type of
cost?
a. Out-of-pocket
b. Marginal
c. Variable
d. Fixed
3. The only method of allocating service department costs to producing departments that
considers reciprocal service is called the
a. Direct method
b. Step method
c. Out-of-step method
d. Algebraic method