Question

Ryder Company produces a single product, school backpacks made of a sturdy nylon fabric. The production of these bags requires a relatively large amount of labour time. Overhead cost is applied on the basis of standard direct labour-hours. The company’s condensed flexible budget for manufacturing overhead is given below:

	Cost Formula			Direct Labour-Hours
	(per DLH)
Overhead Costs				12,000			15,000			18,000
Variable manufacturing overhead cost		$1		$	12,000		$	15,000		$	18,000
Fixed manufacturing overhead cost					75,000			75,000			75,000
Total manufacturing overhead cost				$	87,000		$	90,000		$	93,000

Each backpack requires 2 metres of direct material that has a standard cost of $1.50 per metre. The product requires 1.5 hours of direct labour time. The standard labour rate is $10 per hour.

During the year, the company had planned to operate at a denominator activity level of 15,000 direct labour-hours and to produce 10,000 units of product. Actual activity and costs for the year were as follows:

Number of units produced		11,000
Actual direct labour-hours worked		17,500
Actual variable manufacturing overhead cost incurred	$	15,750
Actual fixed manufacturing overhead cost incurred	$	76,500

Required:

1. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed components.

Predetermined overhead rate		per DLH
Variable rate	$1	per DLH
Fixed rate		per DLH

2. Do the following:

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

	Standard hours

b. Complete the following manufacturing overhead T-account for the year:

Manufacturing Overhead

Actual or applied?			Actual or applied?
Actual or applied?			Actual or applied?
over or underapplied?			over or underapplied?

3. Determine the reason for the underapplied or overapplied overhead from requirement (2) above by computing the variable overhead spending 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).)

	Summary of variances: Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance

4. If the company had chosen 18,000 direct labour-hours as the denominator activity rather than 15,000 hours, indicate which of the following variance given below would change.

	Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance

Answer 1