Question

Morton Company’s budgeted variable manufacturing overhead is $3.00 per direct labor-hour and its budgeted fixed manufacturing overhead is $210,000 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 $20 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $8 per foot.

Although normal activity is 40,000 direct labor-hours each year, the company expects to operate at a 25,000-hour level of activity this year.

Required:

1. Assume that the company chooses 25,000 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 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.

3. Complete two standard cost cards as outlined below.

4. Assume that the company actually produces 18,400 units and works 38,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	121,200
Fixed manufacturing overhead cost		215,000
Total manufacturing overhead cost	$	336,200

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 25,000 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

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Part 1
Predetermined overhead rate:
Variable Overhead Rate		$                3.00	Per Hour
Fixed Overehad Rate	210000/25000	$                8.40	Per Hour
Total		$              11.40	per hour
Part 2
Predetermined overhead rate:
Variable Overhead Rate		$                3.00	Per Hour
Fixed Overehad Rate	210000/40000	$                5.25	Per Hour
Total		$                8.25	per hour
Part 3
at 25,000 Direct Labor Hours
	Units	Cost	Total Cost per unit of Output
Direct Material	2	$                8.00	$                                             16.00
Direct Labor	2	$              20.00	$                                             40.00
Variable Overhead	2	$                3.00	$                                                6.00
Fixed Overhead	2	$                8.40	$                                             16.80
Total Cost per unit			$                                                   79
at 40,000 Direct Labor Hours
	Units	Cost	Total Cost per unit of Output
Direct Material	2	$                8.00	$                                             16.00
Direct Labor	2	$              20.00	$                                             40.00
Variable Overhead	2	$                3.00	$                                                6.00
Fixed Overhead	2	$                5.25	$                                             10.50
Total Cost per unit			$                                             72.50
Part 4a.
Standard direct labor-hours allowed for this year’s production	18400 Actual Production*2 Budgeted Hours	36,800
Part 4b.
Part 4b. Manufacturing Overhead Actual $                                              121,200 Applied $                                         114,000 38000*3 $                                              215,000 $                                         319,200 38000*8.4 Overapplied $                                                97,000 Part 4c. Part 3 Standard Hour Rate $                3.00 Standard Hour 36800 Actual Hours 38000 Actual Hour Rate 121200/38000 $                3.19 Variable Overhead Rate Variance AH(AR-SR) 38000*(3.19-3) 7200 Unfavorable Variable Overhead Efficiency Variance SR(AH-SH) 3*(38000-36800) 3600 U Fixed Overhead Volume Variance (SH*Budgeted Rate)- Budgeted (36800*5.25)-210000 16800 U Fixed Overhead Budget Variance Variance Actual-Budgeted 215000-210000 5000 U