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 $2 per direct labor-hour and the budgeted fixed manufacturing overhead is $480,000 per year.

The standard quantity of materials is 3 pounds per unit and the standard cost is $7 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12 per hour.

The company planned to operate at a denominator activity level of 60,000 direct labor-hours and to produce 40,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		42,000
Actual direct labor-hours worked		65,000
Actual variable manufacturing overhead cost incurred	$	123,500
Actual fixed manufacturing overhead cost incurred	$	483,000

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

COST	Budgeted	Actual
Varaible Overhead (per labour hour)	2	123500
Fixed Overhead	480000	483000
Material (pounds per unit)	3
Material Cost (per pound)	7
Direct Labour Hours per unit	1.5
labour rate per hour	12
Direct labour hours	60000	65000
Volume	40000	42000
Predetermined Overhead Rate
Fixed Overhead	480000
Variable overhead (2*60000)	120000
Total Overhead	600000
Predetermined Overhead Rate	Total Overhead/Total Direct Labour Hours
	600000/60000
	10	per labour hour
Variable Overhead	2 per labour hour
Fixed Overhead	480000/60000	8 per labour hour
Standard Cost Card
		Per unit
Volume	40000
Direct Material (3*7*40000)	840000	21
Direct Labour (1.5*40000*12)	720000	18
Variable Overhead (2*60000)	120000	3
Fixed Overhead	480000
Total Standard Cost	2200000
Standard Direct Labour hours allowed
Direct labour hour per unit	1.5
No. of units produced	42000
Direct labour hours allowed as per standard	63000
(42000*1.5)
Manufacturing Overhead A/c
Particulars	Debit	Particulars	Credit
Variable Overhead	123500	Overhead Applied to Jobs	606500
Fixed Overhead	483000
Total	606500	Total	606500
Budgeted Rate	2
Actual Rate	123500/65000
	1.9
Variable Overhead Rate Variance	Actual Rate-Budgeted Rate
	1.9-2
	-0.1	Favourable
Total Labour rate for actual units	6300
Variable Overhead Efficiency Variance
Actual Labour Hours	65000
Actual Units	42000
Actual hour per unit	1.5476
Standard Labour hour	1.50
Variance	Actual-Budgeted
	1.5476-1.50
	0.0476	unfavourable
Total Efficiency Variance	2999
Fixed Overhead Rate Variance	Actual-Budget
	483000-480000
	3000
Fixed Overhead Volume Variance
Predetermined Overhead rate	10 per labour hour
Standard Fixed Over head	Standard hours*Predetermined rate *actual units
	1.5*8*42000
	504000
Actual Fixed Overhead	483000
Variance	483000-504000
	-21000