Cost Accounting and Control Accounting for Manufacturing Overhead

Accounting for Overhead

Activating Prior Learning

Identify the following overhead cost as to variable, fixed or semi-variable.

_______1. Overheads which do not vary with the volume of output within a certain range of
activity and within a certain period of time

_______2. Overheads are directly related with the change of the volume of output

_______3. The relationship between the volume of output and the overhead is linear

_______4. They remain fixed at a certain level of activity but will incur additional overhead cost as
volume of output varies

_______5. Total overhead remains unaffected by the volume of output

_______6. Per unit cost of a product will be decreased if the volume of output increases, and vice-
versa in the opposite case.

_____7. Unit overhead cost is likely to remain constant at all levels although the total overhead cost
will vary with the volume of production

This time, try to assess yourself on how familiar you are about the topic. Check your answers
to the above activity.
Answers
1. Fixed 2. Variable
3. Variable 4. Semi-variable
5. Fixed 6. Fixed
7. Variable

How many correct answers did you get?

Try to assess your performance based on the given scores and their descriptive value.
7 - Excellent
5-6 - Good
4 - Fair
0-3 - Poor

Congratulations! You did a great job.

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

Presentation of Content

Classification of Manufacturing Overheads

A cost is whether a direct cost or overhead. This is depending upon the degree of
departmentalization and explicit conditions of a specific cost. For instance, an equipment is rented for
general use, the rent are treated as overhead. However if that equipment is hired or utilized for
specific manufacturing work the rent payment will be charged to that specific work.

Figure 7.1 Classification of Overhead

Source: https://www.yourarticlelibrary.com

Power or electrical consumption is another example. Power consumption is normally treated

as direct expense if it is consumed for single plant or machinery and directly attributed to production
of products or rendering of services. But if there are number of machines consume the power, then
power will be treated as overhead and will be apportioned to the different machine centers on some
equitable basis, which have used power

Overhead costs may be classified according to :

a. Functions
b. Element and
c. Behaviour
Classification According to Functions
The main groups of overheads on the basis of this classification are :

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
a. Production overhead,
b. Office and Administration overhead,
c. Selling Distribution overhead.

Production Overhead

This is also termed as manufacturing overhead, works overhead or production overhead, if

expenditure incurred refers to manufacturing operations. It is the combination of factory indirect
material cost, indirect wages and indirect expenses. Unlike direct materials and direct labour,
manufacturing overhead is not a visible or tangible part of the completed product. Examples of those
expenses are: lubricants, consumable supplies, direct wages, manufacturing facility electricity and
light, depreciation of plant and machinery.

Office and Administration overhead

This includes all charges incurred in lined with direction, control and administration (such as clerical,
accounting and financial management) of a project which is not directly related to manufacturing,
promoting and distribution function. Examples are : . Examples are : general management salaries,
audit fees, legal charges, Postage and telephone, stationary and printing, office rent and rates, office
lighting, and salaries of office staff etc.

Selling and Distribution overhead

Selling Overhead: These are the cost of seeking to create and simulate demand or of scoring orders.
Examples are advertising, salaries and commission of sales personnel, showroom expenses, travelling
expenses, bad debts, catalogues and price lists etc.

Distribution overhead: It comprises all expenditure incurred from the time product is completed in the
factory until it reaches its destination or customer. It includes packing cost, carriage outward, delivery
van costs, warehousing costs, etc.

Both selling and distribution costs are incurred after the production work is over and thus taken
together, these are known as ‘After Production Costs’.

Classification According to Elements

The main classes under this classifications are:
a. Indirect materials- These are materials used in production but they are not physically
included or form part of the finished products or the have very small value or cost
relative to the total cost of a finished product. Examples are: consumable supplies,
single used tools, fuels, lubricants, and the like.
b. Indirect labor- Indirect labor salaries and wages of indirect workers or staff such as salary of
supervisory staff, production manager, payment for idle time, leave and holidays, salary of
foremen, employer’s contributions to P.F., wages for maintenance workers, wages of store-
keeper and the like.

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
c. Indirect expenses- Indirect expenses include: Insurance, Rent, fees and taxes Repairs and
maintenance of property plant and equipment, depreciation on plant and machinery used for
production purposes and etc.

Classification and Nature of Overhead According to Behavior

Overhead costs respond or behave in different ways as volume of production changes.
There are three classification of overhead when classified according to behavior and they are
the following:

a. Fixed overhead - Fixed overheads are those overheads which do not vary with the
volume of output within a certain range of activity and within a certain period of time.
Fixed overheads remain unaffected by the volume of output, however it is important
to note that per unit cost of a product will be decreased if the volume of output
increases, and vice-versa in the opposite case.

Examples of fixed overheads includes fix rent, taxes, salaries, depreciation of plant
and machinery, interest on capital, professional fees, etc.

Fixed Cost Pattern

b. Variable overhead-those overheads that are directly related with the change of the volume
of output. The relationship between the volume of output and the variable overheads is linear,
that is, as the volume of output increases, total variable overhead cost also increases and vice-
versa in the opposite case. The unit variable overhead cost is likely to remain constant at all
levels although the total variable overhead will vary with the volume of production. Examples
is the indirect material or indirect labor, salesmen’s commission, fuel, etc.

Variable Cost Pattern

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
c. Semi-fixed or semi variable overhead - These overheads are partly variable and partly
fixed. They remain fixed at a certain level of activity but will incur additional variable cost as
volume of output varies. Example of these overheads includes depreciations on plant and
machinery, repairs and maintenance of Plant and Machinery, etc.
Semi-variable cost pattern

Importance of Classifying Costs into Fixed and Variable

The fixed and variable cost classification is of great importance in planning, decision making
and control as discussed below:

1. Preparation of budgets: This classification helps in the preparation of budgets. For

instance, when flexible budgets are prepared for different levels of activity, the fixed cost
remains constant at all levels of activity, whereas variable cost varies according to the actual
level of output.
2. Decision-making: As most problems of decision-making relate to changes in volume, this
classification acquires a special importance in managerial decision-making. This is so
because fixed and variable costs behave in different ways when volume of output changes.
3. Control of costs: From control point of view, cost may be controllable or uncontrollable.
The fixed costs are mostly uncontrollable and if, at all, any control can be exercised, it can be
done by the top management. Variable costs, on the other hand, are mostly controllable. For
example, rent of building (fixed) is not easily controllable but cost of materials (variable)
may be controlled by purchasing in economic lots, seasonal purchasing, etc. Classifying costs
into fixed and variable, therefore, helps in the effective control of costs by painting out where
management should concentrate to control costs.

4. Marginal costing and break-even analysis: This technique is totally depending on

segregation of cost into fixed and variable.
5. Absorption of overhead: By classifying cost into fixed and variable, separate rates of
absorption of overhead may be used for fixed and variable overheads. The under-over
absorption arising out of two types of overheads are different in nature and need different
managerial action. For example, under absorption of fixed overhead means the existence of
surplus or idle capacity so that suitable steps may be taken to effectively utilise idle capacity.

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
Overhead Rates
Overhead can be accumulated based on actual cost or budgeted cost. However, not
like direct cost of materials and labor, actual overhead costs are hardly determine
instantaneously, thus cost accountants need to establish a predetermined overhead rates to
prompt managers in making timely decisions. The predetermined overhead rates can be
computed by dividing the total budgeted overhead cost or indirect cost by an allocation
measure, usually a direct cost.

Factory Overhead Variance

The difference between the actual factory overhead (shown in the factory overhead control
account) and the overhead charge to production as shown by the factory overhead applied account

The factory overhead variances are classified into:

1. Under-applied overhead – It is the difference between the actual and applied and this
happens when the actual overhead is more than the applied
2. Over-applied overhead - It is the difference between the actual and applied overhead when
the actual is less than the applied

The occurrence of over or under-applied overhead is normal in manufacturing processes, because

overhead is applied to work in process using predetermined rates.

Recognition of over or under-applied overhead

Actual manufacturing overhead costs are debited and applied manufacturing overhead are credited to
manufacturing overhead account. Actual overhead cost are debited as they are incurred and applied
are credited as they are applied to production. At the end of the period, the balances of the debit and
credit of the manufacturing overhead account reveals whether overhead is over or under applied. If
the debit is greater than the credit, this means an under-applied overhead. If it is in the other way
around, (credit is greater than the debit), it means that the overhead is over-applied.

Disposition of over or under-applied overhead

The manufacturing overhead (over or under-applied), at the end of accounting period, is
closed by either:

a. allocating it among work in process, finished goods or cost of goods sold accounts or
b. fully disposed off to cost of goods sold account at the end of the accounting period.

A. Allocating it among work in process, finished goods or cost of goods sold accounts.

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
Pro-forma entry

When overhead is under -applied

Debit Credit
Work in process PXXX
Finished goods PXXX
Cost of goods sold PXXX
Manufacturing overhead PXXX
When overhead is over- applied

Debit Credit
Manufacturing overhead PXXX
Work in process PXXX
Finished goods PXXX
Cost of goods sold PXXX

B. Fully disposed off to cost of goods sold account at the end of the accounting period.

When overhead is under-applied

Debit Credit
Cost of goods sold PXXX
Manufacturing overhead PXXX
When overhead is over-applied

Debit Credit
Manufacturing overhead PXXX
Cost of goods sold PXXX

Factors to be Considered in the Computation of Overhead Rate

1. Base to be used
a. Physical Count
b. Direct Materials Cost
c. Direct Labor Cost
d. Direct Labor Hours
e. Machine Hours
2. Activity level to be used
a. Normal Capacity
b. Actual Capacity
3. Inclusion or exclusion of fixed overhead
a. Absorption Costing
b. Direct Costing
4. Use of single rates or several rates

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
a. Plant-wide
b. Departmentalized rate

Based to be used

In order to achieve a relevant overhead cost, it is very important to note that the base to be
used should be related to functions characterized by the overhead cost being applied.
 Based on material cost – if the operation is material oriented
 Based on labor cost – if the operation is labor intensive
 Based on machine hours – if operation is highly machine operated
 Based on unit produced – if it is highly traceable in production

Illustrative Problem 5.1:

Expert Furniture Company estimates factory overhead at P225,000 for the next fiscal year. It
is estimated that P45,000 units will be produced at a material cost of P300,000. Conversion
cost will require an estimated 50,000 direct labor hours at a cost of P2.00 per hour, with
15,000 machine hours.

Required: Compute the predetermined factory overhead rate based on the following:
1. Material cost
2. Units of production
3. Machine hours
4. Direct labor hours
5. Direct labor cost

Solutions:
1. Factory overhead rate = Estimated Factory Overhead
Estimated Direct Material Cost

=P 225,000
300,000

=P 0.75
or 75% of direct material cost

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
2. Factory overhead rate = Estimated Factory Overhead
Estimated Units of Production

=P 225,000
45,000

=P 5.00
P5.00 per unit produced

3. Factory overhead rate = Estimated Factory Overhead

Estimated Machine Hours

=P 225,000
45,000

=P 15.00
P15.00 per machine hour

4. Factory overhead rate = Estimated Factory Overhead

Estimated Labor Hours

=P 225,000
50,000

=P 4.50
P4.50 per direct labor hour

5. Factory overhead rate Estimated Factory Overhead

Estimated Labor Cost

P 225,000
100,000

P 2.25
225% of labor cost

When all departments in the company will homogenously use the rates computed in the
illustration above, it will be considered as plant-wide or blanket rate. A single factory
application rate can be used when:
1. Single product is being manufactured
2. Different products manufactured process through the same series of productive
department and are charged similar amounts of applied factory overhead rates
When different products being manufactured, either do not pass through the same series of
productive department, or if they do, they should be charged different amounts of applied

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
factory overhead because of the different amount of work exerted to each product, multiple
departmental overhead application rate is recommended.

Steps in Computation of Departmentalized Overhead Rate

1. Identify the company’s department or cost centers
2. Estimate the factory overhead for each department (direct departmental charges +
indirect departmental charges
3. Select and estimate the base to be used by each department
4. Allocate the service department costs to producing department
5. Compute the factory overhead rate
Factory overhead should be estimated and budgeted for each department in a
departmentalized company. The budgeted departmental expenses are based on actual factory
overhead expenses. Departmentalized overhead rates are for producing departments only.
Producing departments are the cost centers in which work are performed directly on the
goods being produced. Service departments on the other hand, include support activities to
producing department such as maintenance, personnel, employee services, provision of heat,
power and light which are necessary for the entire manufacturing activity.
Typical Allocation Bases for Common Costs

1. Labor related costs

2. Machine related costs
3. Space related costs
4. Service related costs
Common costs should be analysed carefully to determine the most appropriate allocation
base. The typical allocation bases for common costs are shown as follows:

Common Cost Allocation Base

Labor related

 Supervision  Number of employees

 Labor cost
 Labor hours

 Personnel services  Number of employees

Machine related

 Insurance on equipment  Value of equipment

 Taxes on equipment  Value of equipment

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
 Equipment depreciation  Machine hours
 Equipment value
 Equipment Maintenance  Number of machines
 Machine hours
Space related

 Building rental  Space occupied

 Building insurance  Space occupied
 Heat and air conditioning  Space occupied
 Volume occupied
 Concession rental  Space occupied
 Building maintenance  Space occupied
Service related

 Material handling  Quantity/ value of materials

 Billing and accounting  Number of documents
 Indirect materials  Value of direct materials

Methods of Allocating Service Department Cost to Producing Department

1. Direct method
This is the most commonly used method. This method ignores any service rendered
by one service department to another, that is, it allocates each service department’s
total cost direct to the producing department
2. Step method
It is also called as sequential method of allocation. Not like the direct method, this
method recognizes services rendered by service departments to other service
departments and is more complicated because it requires a sequence of allocation. The
sequence usually starts with the department that renders service to the greatest number
of other service department and ends with the department that renders service to the
least number of other department. Once a service department’s costs are already
allocated, no subsequent service department costs are allocated to it.
3. Algebraic method
This is also called as reciprocal method. This method allocates cost by explicitly
including the mutual services rendered among all departments

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

Illustrative Problem 5.2

Skilful Company’s factory is divided into four departments:
Producing departments; Molding and Decorating department

Service departments: Buildings and Ground department; and the Factory Administration
department.
Buildings and Grounds cost will be allocated using square feet (floor area) and Factory
administration cost will be allocated using direct labor hours. In computing predetermined
overhead rates, machine hours are used as the base in Molding and direct labor hours as the
base in Decorating

Bldg. & Factory

Molding Decorating
Grounds Admin

Budgeted Factory Overhead P400,000 P600,000 P80,000 P120,000

Direct labor hours 200,000 100,000

Floor area 100,000 60,000 2,000 4,000

Machine hours 200,000 100,000

Required: Allocate the cost of service departments using:

1. Direct method
2. Step method
3. Algebraic method

Solution

1. Direct Method Molding Decorating

Budgeted Factory Overhead P 400,000 P600,000
Allocated FOH
(100,000
B&G (based on floor sqft/160,000 sqft)x (60,000 sqft/160,000
area) P80,000 50,000 sqft)x P80,000 30,000
(200,000hrs/
Factory Admin ( based 300000hrs)x (100,000hrs/
on Direct labor hours) P120,000 80,000 300000hrs)x P120,000 40,000

Total FOH 530,000 670,000

Machine Direct labor
Divide by: Base hours 200,000 hours 100,000
P6.70/
FOH Rate P2.65/MHr DLHr

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

3. Algebraic Method
Additional information for the illustrative problem:
Services provided by
B &G FA
Molding 50% 40%
Decorating 30% 50%
B&G N/A 10%
FA 20% N/A

Algebraic Equation:
B&G = 80,000 + 10%(FA)
FA = 120,000 + 20% (B&G)

Substitution:
B&G = 80,000 + 10% (120,000 + .20B&G)
= 80,000 + 12,000 +.02B&G
B&G-.02B&G = 92,000
.98B&G = 92,000
B&G = 92,000
0.98
B&G = 93,878

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

FA =120,000 + 20% (BG)

=120,000 + .20 (93,878)
=120,000 + 18,776
FA =138,776

Allocation using the

Molding Decorating
amount computed above B&G FA
Budgeted Factory P
Overhead 400,000 P600,000 80,000 120,000
Allocated FOH
B&G (10% FA)
13,878
Factory Admin (20%
B&G) 18,776
B&G 50% 48,781 30% 29,286
93,878
Factory Admin 40% 81,301 50% 40,650
138,776
Total FOH 130,082 669,918
Direc
Machin
Divide by: Base e hours 200,000 t 100,000
labor
hours
FOH Rate P2.51/MHr P6.98/DLHr

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

Application

Congratulations! You have just completed the topic.

I prepared some activities for you to assess your learning. Please
answer/accomplish the following activity/ies

I. True or false:
_______1. Fixed overheads are directly related with the change of the volume of output

_______2. Fixed overhead’s relationship between the volume of output and the overhead is linear

_______3. Semi-variable overheads remain fixed at a certain level of activity but will incur
additional overhead cost as volume of output varies

_______4. Under variable overhead, total costs remain unaffected by the volume of output

_______5. Under fixed overhead costs, per unit cost of a product will be decreased if the volume of
output increases, and vice-versa in the opposite case.

______6. The difference between the actual factory overhead and applied overhead is called overhead
variance

______7. Applied manufacturing overhead costs are debited and Actual manufacturing overhead are
credited to manufacturing overhead account

______8. Allocating it among work in process, finished goods or cost of goods sold accounts is more
appropriate however it is more time consuming.

______9. If operation is highly machine operated, it is recommended to use the labor cost as
based in computing predetermined rate
______10. A single factory application rate cannot be used when different products
manufactured process through the same series of productive department and are charged
similar amounts of applied factory overhead rates
______11. The first step in departmentalized overhead rate is identifying the company’s
department or cost centers

______12. Direct method ignores any service rendered by one service department to another

______13. Step method allocates cost by explicitly including the mutual services rendered
among all departments

______14. From control point of view, cost may be controllable or uncontrollable

______15. The fixed costs are mostly uncontrollable

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead

Feedback
Name ____________________________Section_____________Score________
Multiple Choice
1. Which of the department below can be classified as a producing department ?
A. Production Control
B. Utilities
C. Finishing
D. Medical
2. Which of the department below can be classified as a service department ?
A. Refining
B. Receiving
C. Mixing
D. Assembly
3. In determining the right method for allocating equipment depreciation to departments, the
best recommendation is to:
A. use the cost of equipment in the department as a basis for allocation
B. allocate on the basis of square footage used in a given department
C. charge the amounts to General Plant
D. use algebraic techniques

4. The most reasonable basis for allocating worker's compensation insurance is:
A. departmental payroll
B. building depreciation
C. kilowatt-hours
D. number of employees
5. A company is attempting to allocate the costs of electricity in various departments. The
variable portion of electricity expense is to be allocated using kilowatt-hours. The
information needed in order to allocate the fixed portion of the current period's electricity
expense is:
A. number of machines in each department
B. estimated materials consumption
C. number of employees
D. square footage in each department
6. A factor to be considered in deciding the kinds of departments required for establishing
accurate departmental overhead rates with which to control costs is:
A. location of operations, processes, and machinery
B. responsibilities for production and costs
C. number of departments or cost centers
D. similarity of operations, procedures, and machinery in each department
E. all of the above
7. Services available for the benefit of producing departments and other service departments
can be organized by:
A. establishing a separate service department for each function
B. combining several functions into one department
C. placing service costs in a department called "general factory cost pool"

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
D. none of the above
E. all of the above
8. The Janitorial Department provides cleaning services to all departments of a large store.
Management wishes to allocate the janitorial costs to the various departments that benefit
from the service. The most reasonable allocation base for janitorial costs would be:
A. sales of each department
B. square footage of each department
C. number of employees in each department
D. total direct costs of each department before any allocations
E. none of the above
9 An automotive company has three divisions. One division manufactures new
replacement parts for automobiles; another rebuilds engines; and the third does repair and
overhaul work on a line of trucks. All three divisions use the services of a central payroll
department. The best method of allocating the cost of the payroll department to the
various operating divisions is:
A. total labor hours incurred in the divisions
B. value of production in the divisions
C. direct materials costs incurred in the divisions
D. machine hours used in the divisions
10. Multiple overhead rates are most commonly used when:
A. production consists of long runs of a single product
B. the company has more than one production department
C. manufacturing operations are labor intensive
D. production consists of a diverse product line
E. none of the above
11. An example of a no volume-related overhead base would be:
A. direct materials cost
B. number of setups
C. machine hours
D. direct labor peso amount
12. An example of a department that would be a prime candidate for multiple overhead rates
would be one whose overhead was primarily:
A. labor driven
B. machine related
C. caused by setups and production design changes
D. materials related
13. Manufacturing overhead applied was P1,200,000, while actual overhead incurred was
P1,240,000. Which of the following is true?
A. Direct labor was over estimated
B. Overhead was over-applied by P40,000
C. Overhead was under-applied by P40,000
D. There difference should be reported as loss for the period

14. In determining factory overhead rates, the numerator of the formula will be the
A. Actual factory overhead for the next period
B. Estimated factory overhead for the next period
C. Actual labor hours for the next period
D. Estimated labor hours for the next period
15. What is the best base to be used if the overhead is highly traceable in production ?

Cagayan State University

Cost Accounting and Control Accounting for Manufacturing Overhead
A. Based on material cost
B. Based on labor cost
C. Based on unit produced
D. Based on machine hours

II: PROBLEM SOLVING

1. The following information is shown by Expert Manufacturing company in its first year of
operation:

Applied overhead P100,000

Actual overhead P120,000
Units completed 100 units
Units sold 75 units
Work in process P35,000

Required:

a. Determine the over or under-applied overhead

b. Allocate the over or under-applied overhead through journal entries among cost of goods
sold, finished goods, and work in process.

2. G&E Furniture Company estimates factory overhead at P750,000 for the next
accounting period. It is estimated that P75,000 units will be produced at a material
cost of P500,000. It is estimated that 35,000 direct labor hours at a cost of P4.00 per
hour and 10,000 machine hours will be employed.

Required: Compute the predetermined factory overhead rate based on the following: (Use
2 decimal places in rounding off your answers.)

1. Material cost
2. Units of production
3. Direct labor hours
4. Direct labor cost
5. Machine hours

Cagayan State University

Cost Accounting and Control Accounting for Overhead

3. A hospital has a P100,000 expected utility bill this year. The Janitorial, Accounting,
and Orderlies Departments are service functions to the Operating, Hospital Rooms, and
Laboratories Departments. Floor space assigned to each department is:
Department
Sq. footage
Janitorial 1,000
Accounting 2,000
Orderlies 7,000
Operating 4,000
Hospital Rooms 30,000
Laboratories 6,000
How much of the P100,000 will eventually become the Hospital Rooms Department total
costs, assuming use of the direct method of allocation based on square footage?

4. J&R Manufacturing Company has two production departments (Fabrication and Assembly) and
three service departments (General Factory Administration, Factory Maintenance, and Factory
Cafeteria). A summary of the year's costs and other data for each department prior to allocation of
service department costs appears below.
General
Factory Factory
Factory
Fabrication Assembly Administration Maintenance Cafeteria
Labor costs 2,050,000
1,950,000 90,000 82,100 87,000
Material costs 950,000 ---
3,130,000 65,000 91,000
Overhead 1,850,000
1,650,000 70,000 56,100 62,000
Direct labor hours 437,500
562,500 31,000 27,000 42,000
Number of employees 200
280 12 8 20
Square footage
72,000
occupied 88,000 1,750 2,000 4,800

The costs of the General Factory Administration Department, Factory Maintenance

Department, and Factory Cafeteria are allocated on the basis of direct labor hours, square
footage occupied, and number of employees, respectively. There are no manufacturing
overhead variances: (Round all final calculations to the nearest peso)
1. Assuming that J&R elects to distribute service department costs under the direct
method of cost allocation, the amount of Factory Maintenance Department costs that
would be allocated to the Fabrication Department is

Cagayan State University

Cost Accounting and Control Accounting for Overhead

2. The amount of General Factory Administration Department costs that would be

allocated to the Assembly Department under the direct method is

3 Assuming that Carmichael elects to distribute service department costs to other service
departments using the step method of cost allocation and that the order of distribution is
based on the dollar amount of costs originating in the service departments, how much of
the total Factory Cafeteria cost would be allocated to the Factory Maintenance
Department?

Summary
In the first part of the topic, you had learned the classification of overhead costs.
It was emphasized in the topic the importance of classifying cost into fixed or variable.
The most interesting part of the topic was the determination of overhead rates and since
actual overhead costs are hardly determined immediately, you had learned that
accountants or managers should establish predetermined overhead rates for better and
timely decisions making.

The used of predetermined rates resulted to disagreement between the actual and
applied overhead. The difference is recognized as over or under-applied which will be
reconciled or disposed off proportionately to cost of goods sold, finished goods and work
in process or to the cost of goods sold alone.

In this unit, you also learned how to select an appropriate base or activity and properly
allocate overhead costs to different departments using the direct, step and algebraic
method.

Reflection

Have a cooking bonding with your family member or love ones. Try to cook or
manufacture your favorite food product (example banana cue, pan cakes, etc.) and
list down the following:
1. Number of units that you produced
2. Number of persons employed
3. Total hours used in the production process
4. Total cost incurred and classify them as to

Cagayan State University

Cost Accounting and Control Accounting for Overhead

 direct material
 direct labor (assume labor cost is P40/hour)
 Overhead cost. (indirect material, indirect labor or other
indirect expense)
5. Classify the overhead cost as to fixed or variable overhead
After doing the activity above, answer the following question:
A. Why is classifying overhead as to fixed and variable important in
manufacturing activities?
B. In your cooking activity, what would the best base to be used in
predetermining your overhead rate? Discuss.

References

Directorate of Distance Education Guru Jambheshwar University HISAR-125001, Cost

& Managerial Accounting. Competent Printing Press
De Leon, Guillermo M, and Norma D., Cost Accounting
Horngreen, Charles T. Srikhant D. et al. Cost Accounting: A Managerial Emphasis
14th Edition
University of Calicut, Cost Accounting. Calicut University, P.O. Malappuram, Kerala,
India-673 635

https://www.accountingformanagement.org/over-or-under-applied-manufacturing
overhead/

https://www.accountingtools.com

https://www.yourarticlelibrary.com/accounting/overheads/classification-of-overheads-
4-categories/74467

Cagayan State University