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 $3.20 per direct labor-hour and the budgeted fixed manufacturing overhead is $864,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $6.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12.60 per hour.

The company planned to operate at a denominator activity level of 120,000 direct labor-hours and to produce 80,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		96,000
Actual direct labor-hours worked		156,000
Actual variable manufacturing overhead cost incurred	$	312,000
Actual fixed manufacturing overhead cost incurred	$	936,000

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

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1
Predetermined Overhead Rate	1248000/120000	$                           10.40	per DLH
(Budgeted Total Manufacturing overhead/Budgeted Direct Labor Hour)
Variable Overhead Rate	$                                                            3.20	per DLH
Fixed Overhead Rate (9.6-2.8)	$                                                            7.20	per DLH
Fixed Overhead	$                                                     864,000
Variable Overhead (1200000*3.2)	$                                                     384,000
Total Manufacturing overhead	$                                                  1,248,000
2 Standard Cost card of the company:
	Quantity	Rate	Total Cost per unit
Direct Material	4	$                              6.00	$                        24.00
Direct Labor	1.5	$                           12.60	$                        18.90
Variable Overhead	1.5	$                              3.20	$                          4.80
Fixed Overhead	1.5	$                              7.20	$                        10.80
Total Cost per unit			$                        58.50
3a. Standard Direct Labor hour:
Units Produced	96,000	Units
Standard Direct Labor hour required for production	144,000	Hours
(96000*1.5 Hour)
3b. Manufacturing overhead T Account:
Applied overhead (10.4*96000)	$                                                     998,400
Debit		Credit
1	$                                               312,000.00	3	$             998,400.00
2	$                                               936,000.00	COGS-Underapplied	$             249,600.00
Actual Hours	156,000.00
4. Variance
Variable Overhead Rate Variance	Actual Variable Overhead-(AH*SR)	312000-(156000*3.2)	$                   187,200	F
Variable overhead efficience Variance	(AH-SH)*SR	(156000-144000)*3.2	$                     38,400	U
Fixed Overhead Budget Variance	Actual-Budgeted	936000-864000	$                     72,000	U
Fixed Overhead VOlume Variance	(SH*Budgeted Rate)- Budgeted	(144000*7.2)-864000	$                   172,800	F