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In: Accounting

Flounder Company produces one product, a putter called GO-Putter. Flounder uses a standard cost system and...

Flounder Company produces one product, a putter called GO-Putter. Flounder uses a standard cost system and determines that it should take one hour of direct labor to produce one GO-Putter. The normal production capacity for this putter is 130,000 units per year. The total budgeted overhead at normal capacity is $1,170,000 comprised of $390,000 of variable costs and $780,000 of fixed costs. Flounder applies overhead on the basis of direct labor hours.

During the current year, Flounder produced 79,100 putters, worked 82,500 direct labor hours, and incurred variable overhead costs of $142,380 and fixed overhead costs of $660,900.

Compute the total overhead variance.

Total Overhead Variance

Compute the applied overhead for Flounder for the year.

Overhead Applied
Predetermined Overhead Rate

Variable $ & Fixed $

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Solution

Flounder Company

a. Predetermined overhead rate = variable overhead rate per hour + fixed overhead rate per hour

Computation of the predetermined variable overhead rate and the predetermined fixed overhead rate:

Predetermined variable overhead rate = Budgeted variable costs/budgeted direct labor hours

Budgeted variable cost = $390,000

Budgeted direct labor hours = normal production in units x number of hours per unit

Normal production in units = 130,000

Number of hours per unit = 1hour

Budgeted direct labor hours = 130,000 x 1 hour = 130,000 hours

Predetermined variable overhead rate= $390,000/130,000 = $3 per hour

Computation of predetermined fixed overhead rate:

Predetermined fixed overhead rate = budgeted fixed overhead/budgeted direct labor hours

Budgeted fixed overhead cost = $780,000

Budgeted direct labor hours = 130,000 (calculated above)

Predetermined fixed overhead rate per hour = $780,000/130,000 = $6

Hence, predetermined variable overhead rate = $3 per hour and predetermined fixed overhead rate = $6 per hour.

Hence, predetermined overhead rate = $3 + $6 = $9

b. Computation of the applied overhead for Flounder for the year:

Applied overhead for Flounder for the year is calculated as follows,

Overhead applied based on standard hours allowed for actual units of products produced

= predetermined overhead rate x number of units per hour x actual units produced

Predetermined overhead rate = $9

Number of units per hour = 1

Actual units produced = 79,100

Number of hours = 79,100

Applied overhead for Flounder for the year = $9 x 1 x 79,100 = $711,900

c. Computation of total overhead variance:

Applied standard overhead for actual units produced – (Total variable overhead incurred + total fixed overhead incurred)

= $711,900 – ($142,380 + $660,900) = $91,380 U


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