Factory Overhead

1. A Corporation estimates factory overhead of P207,000 for the next fiscal year. It
is estimated that 52,100 units will be produced at a materials cost of P500,000.
Conversion will require an estimated 85,000 labor hours at a cost of P9 per hour,
with 69,000 machine hours.

Required: Calculate the predetermined factory overhead rate based on:

a. Materials costs. d. Direct labor cost.
b. Units of production. e. Direct labor hours.
c. Machine hours.

2. Cutlery manufactures kitchen knives. One of the employee, whose job is to cut out
wooden knife handles, worked 48 hours during a week in January. The employee earns
P12 per hour for a 40-hour week. For additional hours the employee is paid an
overtime rate of P16 per hour. The employee’s time was spent as follows:
Regular duties involving cutting out knife handles 38 hours
General shop cleanup duties 9 hours
Idle time due to power outage 1 hour

Required:
a. Calculate the total cost of the employee’s wages during the week described above.
b. Determined the portion of this cost to be classified in each of the following
categories:
i. Direct labor
ii. Manufacturing overhead (idle time)
iii. Manufacturing overhead (overtime premium)
iv. Manufacturing overhead (indirect labor)

3. The Ronrox Ink Company prepared the following list in order to determine the
factory overhead in each department for the year 2018:
Factory Overhead Cost Total Cost
Production Departments Service Departments
H G U V W
Rent P250,000 P770,000 P15,000 P14,500 P7,000
Repairs 100,000 120,500 23,000 30,000 7,500
Fuel 350,000 420,000 9,500 7,000 6,000
Indirect labor 157,500 170,000 145,000 100,000 97,500
Indirect materials 61,000 56,500 127,000 94,500 60,000
Heat and Light 202,500 151,200 9,000 6,000 7,500
Depreciation 94,000 71,300 3,000 1,500 2,000
Miscellaneous ___60,000 ___50,500 _____500 _____500 _____500
Total P1,275,000 P1,810,000 P332,000 P254,000 P188,000

Additional data needed for allocation of factory overhead:

Department U services G, V, and W in the ratio of 2:1:1, respectively.
Department V services H, G, U, and W in the ratio of 4:3:2:1, respectively.
Department W services H and G in the ratio of 3:1, respectively.

Required: Assume Department U is allocated first, V is second, and W is last.

a. Allocate the total costs of the service departments to the producing departments
by using the following methods: (1) Direct; (2) Step; (3) Algebraic.
b. Determine the factory overhead application rates for the producing departments
using the following bases: Department H, 100,000 direct labor hours; and Department
G, 195,000 direct labor hours.

4. Globe Telecommunications Corporation manufactures two different fax machines for

the business market. Cost estimates for the two models for the year 2018 are as
follows:
Basic System Advanced System
Direct Material P 400 P 800
Direct labor (20 hours at P15 per hour) 300 300
Manufacturing overhead * __400 ___400
Total P1,100 P1,500

* The predetermined overhead rate is P20 per direct labor hour.

Each model of fax machine requires 20 hours or direct labor. The basic system
requires 5 hours in Dept A and 15 hours in Dept B. The advanced system requires 15
hours in Dept A and 5 hours in Dept B. The overhead costs budgeted in these two
production departments are as follows:

Dept A Dept B
Variable cost P16 per direct labor hour P4 per direct labor hour
Fixed cost P200,000 P200,000
The firm’s management expects to operate at a level of 20,000 direct labor hours in
each production department during 2018.

Required:
a. If the firm prices each model of fax machine at 10 percent over its cost, what
will be the price of each model?
b. Suppose the company were to use departmental predetermined overhead rates.
Calculate the rate for each of the two production department.
c. Compute the product cost of each model using the departmental overhead rates
calculated in requirement (b).
d. Compute the price to be charged for each model, assuming the company continues to
price each product at 10 percent above cost. Use the revised product costs
calculated in requirement (c).
e. Using the information of the main problem, assuming the company has implemented
an activity based cost system with the following activity pools and cost drivers:

Activity Activity Cost Cost driver Basic system Advanced

system
Machine setup P100,000 200 setups 50 setups 150 setups
Material receiving 60,000 80,000 lbs 30,000 lbs 50,000 lbs
Inspection 80,000 1,600inspections 700 inspections 900 inspections
Machinery-related 420,000 60,000 Mhrs 20,000 Mhrs 40,000 Mhrs
Engineering 140,000 7,000 Engr. Hrs 3,000 Engr. Hrs 4,000 Engr. Hrs
Total Overhead P800,000
Globe plans to produce 1,000 units of each model of fax machine.
Required:
i. Compute the cost rate per unit of each cost driver (e.g., the cost per setup).
ii. Determine the total overhead to be assigned to each product line under activity
based costing.
iii. Calculate the overhead assigned per unit of each type of fax machine under ABC.

Direct, Step and Algebraic – Example

Producing Dept Service Dept
1 2 A B Total
Budgeted cost P380,000 P420,000 P40,000 P60,000 P900,000
Use of A 40% 50% 10% 100%
Use of B 40% 30% 30% 100%

ABC - Example
Assume that a company produces two similar products. Raw materials costs are P20 per
unit, direct labor is P70 per unit, and FOH totals P20,000. The Company produces
1,000 units of Product 1 and 100 units of Product 2. Using the direct labor as the
allocation base.
Alternatively, assume that the overhead represent setup costs, with equal setup
times required for the products.

Assume that direct labor costs are only P10 per unit and that overhead totals
P140,000.