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. The budgeted variable manufacturing overhead is $3.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,140,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $7.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12.80 per hour.

The company planned to operate at a denominator activity level of 150,000 direct labor-hours and to produce 100,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		120,000
Actual direct labor-hours worked		195,000
Actual variable manufacturing overhead cost incurred	$	429,000
Actual fixed manufacturing overhead cost incurred	$	1,170,000

Required:

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.

Answer 1

Solution 3a:

Standard driect labor hours allowed for actual production = 120000*1.50 = 180000 hours

Solution 3b:

Predetermined overhead rate = $3.60 + $1,140,000 /150000 = $11.20 per hour

Manufacturing Overhead
Particulars	Debit	Particulars	Credit
Variable manufacturing overhead	$429,000.00	Overhead applied (180000*$11.20)	$2,016,000.00
Fixed manufacturing overhead	$1,170,000.00
Overapplied overhead	$417,000.00
Total	$2,016,000.00	Total	$2,016,000.00

Solution 4:

Actual variable overhead rate = $429,000 / 195000 = $2.20 per hour

Variable overhead rate variance = (SR - AR) * AH = ($3.60 - $2.20) * 195000 = $273,000 F

Variable overhead efficiency variance = (SH - AH) * SR = (180000 - 195000) * $3.60 = $54,000 U

Fixed overhead budget variance = Budgeted fixed overhead - actual fixed overhead

= $1,140,000 - $1,170,000 = $30,000 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhad = (180000*$7.60) - $1,140,000 = $228,000 F