Question

Lane Company manufactures a single product and applies overhead cost to that product using standard direct labor-hours. The budgeted variable manufacturing overhead is $3.40 per direct labor-hour and the budgeted fixed manufacturing overhead is $999,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $6.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12.70 per hour.

The company planned to operate at a denominator activity level of 135,000 direct labor-hours and to produce 90,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		108,000
Actual direct labor-hours worked		175,500
Actual variable manufacturing overhead cost incurred	$	368,550
Actual fixed manufacturing overhead cost incurred	$	1,053,000

Required:

1. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements.

2. Prepare a standard cost card for the company’s product.

3a. Compute the standard direct labor-hours allowed for the year’s production.

3b. Complete the following Manufacturing Overhead T-account for the year.

4. Determine the reason for any underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.

Answer 1

Predetermined overhead rate
Budgeted variable manufacturing oh				459000	(3.40*135000)
budgeted fixed manufacturing OH				999000
total fixed manufacturing OH (a)				1458000
budgeted direct laobur hour (b)				135000
predetermined overhead rate (a)/(b)				10.8
Variable OH rate = 3.40
fixed OH rate = 7.4
2) Standard cost card for company's product
direct material (4*6.5)				26
Direct labour ( 1.5*12.70)				19.05
variable manufacturing OH(1.50*3.40)				5.1
Fixed manufacturing OH (1.5*7.4)				11.1
STANDARD COST				61.25
3-A) Standard direct labour hour allowed for production
108000*1.50 = 162000
3-B ) Manufacturing overhead
manufacturing OH- Variable			368550	WIP			1895400
manufacturing OH- Fixed			1053000	(175500*10.8)
overhead variance			473850
			1895400				1895400
4) Variable overhead rate variance = (std rate-actual rate)*actual hrs
variable overhead rate variance = (3.40-2.10)*175500 = 228150 (F)
Actual rate = 368550/175500= 2.10
variable oh efficiency variance = (Std hr-actual hr)*std rate
variable oh efficiency variance = (162000-175500)*3.40 = 45900 (U)
Fixed OH budget variance = actual fixed OH-budgeted
fixed oh budget variance = 1053000-999000 = 54000 (F)
Fixed oh volume variance = budgeted fixed oh-fixed overhead applied
fixed oh volume variance = 999000-1298700 = 299700 (U)
Fixed overhead applied = 175500*7.40 =1298700