Factory Overhead Rate (FOR)
– Factory Overhead Rate is the predetermined overhead rate which is used to apply manufacturing overhead to production department or products or job orders.
– Normally, it is calculated at the beginning of the period.
– It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).
– Allocation bases may be direct labor hours, direct labor costs, machine hours etc.
Mathematically, FOR is calculated as follows:
Factory Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base
Here in the question, allocation base for factory 1 is Machine Hours and factory 2 is direct labor hours.
Factory Overhead Rate for factory 1 = Estimated factory Overhead Cost for factory 1/ Estimated Machine Hours for factory 1
= 12,900,000 / 600,000 MHs
= $21.50 per machine hour
Factory Overhead Rate for factory 2 = Estimated factory Overhead Cost for factory 2 / Estimated Direct Labor Hours for factory 2
= 10,200,000 / 250,000 DLHs
= $40.80 per direct labor hour
|Factory 1 (Refer note 1)
||Work in process
|Factory 2 (refer note 2)
||Work in process
|| Factory Overhead
Note 1 – Calculation of Applied Factory Overhead to production for Factory 1
Factory Overhead Rate (as calculated above) for factory 1 = $21.50 per machine hour
Actual Machine Hours used for March in factory 1= 610,000 MHs
Applied Factory Overhead = Actual Machine Hours Used x Factory Overhead Rate
= 610,000 MHs x $21.50 per MH
Note 2 – Calculation of Applied Factory Overhead to production for Factory 2
Factory Overhead Rate (as calculated above) for Factory 2 = $40.80 per direct labor hour
Actual Direct Labor Hours used for March in factory 2= 245,000 DLHs
Applied Factory Overhead = Actual Direct Labor Hours Used x Factory Overhead Rate
= 245,000 DLHs x $40.80 per direct labor hour
Applied Factory Overhead = 13,115,000
Estimated Factory Overhead = 12,900,000
Applied Overheads are higher than Estimated Overheads, hence the Overheads are overapplied.
Over-applied Overhead = 13,115,000 – 12,900,000 = 215,000
Applied Factory Overhead = 9,996,000
Estimated Factory Overhead = 10,200,000
Applied Overheads are lesserr than Estimated Overheads, hence the Overheads are under-applied.
Under-applied Overhead = 10,200,000 – 9,996,000 = 204,000