Question

Morton Company’s budgeted variable manufacturing overhead is $3.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $400,000 per year.

The company manufactures a single product whose standard direct labor-hours per unit is 2.0 hours. The standard direct labor wage rate is $15 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $5 per foot.

Although normal activity is 50,000 direct labor-hours each year, the company expects to operate at a 40,000-hour level of activity this year.

Required:

1. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

2. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

3. Complete two standard cost cards as outlined below.

4. Assume that the company actually produces 21,400 units and works 45,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	165,100
Fixed manufacturing overhead cost		401,000
Total manufacturing overhead cost	$	566,100

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

b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.

c. Determine the cause of the 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

a)Standerd direct labour hours=Actual production*Standerd hours required per unit

i.e 21,400units*2hours=42,800hours

b)Pre determined Veriable MOH rate=4$ per DLH

Pre determined Fixed MOH rate=4,00,000$/40,000DLhours=10$ per DLH

MOH account

Amount $	Amount $
Actual MOH 5,66,100	Applied MOH 5,77,800
(1,65,100+4,01,000)	42,800DLH**(3.5+10)$
Over APPLIED MOH 11,700$

Over Applied Overhead Adjusted to cost of goods sold

c)Calculation of veriances

Veriable overhead Efficiancy Veriance= Standered Rate*(Standerd Hours-Actual Hours)

3.5$*(42,800-45,000)=7,700$ UNFAVOURABLE

Veriable overhead Rate Veriance=Actual Hours*(Standered Rate-Actual Rate)

45,000hours*(3.5-3.67)$=7,600$ UNFAVOURABLE

Fixed overhead Volume Veriance=Allocated expenditure-Budgeted expenditure

(42,800hours*10$-40,000hours*10$)= 28,000$ Favourable

Fixed overhead Expenditure Veriance=Budgeted expenditure-Actual expenditure

40,000hours*10$-4,01,000$=1,000$ UNFAVOURABLE