Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. Variable manufacturing overhead should be $4.40 per standard direct labor-hour and fixed manufacturing overhead should be $1,764,000 per year.

  

The company’s product requires 4 pounds of material that has a standard cost of $9.00 per pound and 1.5 hours of direct labor time that has a standard rate of $13.20 per hour.

  

The company planned to operate at a denominator activity level of 210,000 direct labor-hours and to produce 140,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Number of units produced	168,000
Actual direct labor-hours worked	273,000
Actual variable manufacturing overhead cost incurred	$ 709,800
Actual fixed manufacturing overhead cost incurred	$ 1,911,000

Required:
1.	Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements. (Round your answers to 2 decimal places.)

      

2.	Prepare a standard cost card for the company’s product. (Round your answers to 2 decimal places.)

      

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 the underapplied or overapplied overhead from (3) above by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

      

Answer 1

SOLUTION

1. Predetermined Overhead Rate = (Variable overhead rate + (Budgeted Fixed Overhead/Estimated Direct Labor hour))

Predetermined Overhead Rate = ($4.40 + (1,764,000/210,000))

Predetermined Overhead Rate = $4.40 + $8.40 = $12.80

Variable rate = $4.40

Fixed rate =1,764,000/210,000

Fixed rate = $8.40

2.

	(A)	(B)	(A*B)
Direct Material	4 pounds	$9 per pound	36.00
Direct Labor	1.5 hours	$13.20 per hour	19.80
Variable Overhead	1.5 hours	$4.40 per hour	6.60
Fixed Overhead	1.5 hours	$8.40 per hour	12.60
Standard Cost per Unit			75.00

3A.

Standard Direct labor Hour = Actual No of Unit produce* Standard DLH per unit

Standard Direct labor Hour = 168,000 * 1.5

Standard Direct labor Hour = 252,000

3B. Manufacturing Overhead

Particulars	Amount ($)	Amount ($)	Particulars
Actual Variable Overhead	709,800	3,225,600	Applied overhead
Actual Fixed Overhead	1,911,000
		604,800	Overhead over applied

Applied overhead = 252,000 * $12.80 = 3,225,600

4.

(a) Variable Overhead rate variance = (Actual Rate*Actual Hour -Standard Rate*Actual Hour )

Variable Overhead rate variance = ($709,800 - ($4.40*273,000))

= $709,800 - $1,201,200 = $491,400 F

(b) Variable Overhead efficiency variance =(Actual Hour-Standard Hour )Standard Rate

Variable Overhead efficiency variance = (273,000 - 252,000) * $4.40

= $92,400 U

Standard Hour = 168,000*1.5 = 252,000

(c) Fixed overhead budget Variance = Actual Fixed Overhead - Budgeted Fixed Overhead

Fixed overhead budget Variance = 1,911,000 - 1,764,000 = $147,000 U

(d) Fixed overhead volume variances = ( Budgeted Fixed Overhead - Standard Hour Allowed * Standard Rate)

Fixed overhead volume variances = 1,764,000 - (252,000*8.40)

= 1,764,000 - 2,116,800 = $352,800 F