TOPIC 6 – Accounting for Overhead

Prepared by: Olivo, CPA, MBA

Adelle Company applied factory overhead as follows:

Department Factory overhead rate
Pattern Making P7.75 per machine hour
Cutting P15.10 per machine hour
Sewing P2.125 per machine hour

Actual machine hours are: 19,000 hours for pattern making, 27,500 hours for cutting and 5,500 hours for sewing.

1. If the actual factory overhead cost for the period is P574,375, how much is over (under) applied factory overhead.

PSA Company currently uses a plantwide overhead application based on expected direct labor hours to be used. The following
information is anticipated at the beginning of the year:

Department A Department B
Direct materials P25,000/lb P17,000/lb
Direct labor hours 10,000 5,000
Machine hours 2,000 10,000
Overhead P115,000 P85,000
Labor rate P15.00/hr P12.00/hr

2. If the firm maintains the current method, what will be the overhead application rate?
3. If departmental rates were adopted, what would be the rate for Dept A (based on direct labor hours)

JJBL Corporation produces reusable Christmas cards in two departments: Printing and Laminating. These departments are supported
by two service departments: Personnel and Maintenance. Personnel uses the number of employees as an allocation base and
Maintenance uses machine hours. The expected level of activity for next quarter is shown below:

Direct Cost No. of employees Machine Hours

Personnel P93,000 40 -
Maintenance P68,000 80 -
Printing P250,000 120 60,000
Laminating P300,000 180 40,000

Allocations are made in the order shown above:

4. What is the total cost of printing (actual and allocated) under the direct method?
5. What is the total cost of laminating (actual and allocated) under the step method?

Totes and Beyond collected the following information from their cost accounting system:

Wedding Birthday Graduation

Direct materials cost P2,000 P1,820 P4,000
Direct labor hours 2.40 0.30 4.50
Number of parts 6 20 4
Manufacturing lead time (hrs) 0.6 2.4 3.0

The direct labor rate in 2019 is P15.00 per hour. Totes and Beyond’s previous product costing system had an indirect allocation rate
of 200 percent of direct labor costs during 2009. Under the new costing system, overhead costs are assigned based on number of
parts and manufacturing lead time. The budgeted materials handling overhead cost rate is P4.00 per part, and the budgeted
production overhead cost rate is P25 per hour of lead time.
6. What is the total manufacturing costs of the wedding invitations under the prior costing system?
7. What is the total manufacturing costs of the wedding invitations under the new costing system?
Naveen Company’s normal operating capacity is estimated at 100,000 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 P40,800. During November, the
company operated 95,000 machine hours. Actual factory overhead totaled P75,000.

8. The factory overhead applied for the month is

9. The spending variance
10. The idle capacity variance

Leleng Corporation has decided to distribute the cost of service departments by the simultaneous method. The production
departments are P1 and P2, the service departments are S1 and S2, and the monthly data are:

Budgeted Factory Overhead costs before Services from S1 Services from S2

distribution
P1 P94,000 40% 50%
P2 P85,000 50% 30%
S1 P20,000 - 20%
S2 P17,600 10% -

11. Compute the factory overhead rate for P1 using 50,000 direct labor hours and P2 using 20,000 machine hours using the
Direct Method.
12. Compute the factory overhead rate for P1 and P2 under Step method – starting with S1 (use 50,000 DL hrs. for P1 and
20,000 machine hours for P2)
13. Compute the total cost of P1 and P2 to be allocated using the simultaneous method (algebraic method)
14. Compute the factory overhead rate for P1 and P2 under the algebraic method.