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 $4.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,935,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $9.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.30 per hour.

The company planned to operate at a denominator activity level of 225,000 direct labor-hours and to produce 150,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		180,000
Actual direct labor-hours worked		292,500
Actual variable manufacturing overhead cost incurred	$	789,750
Actual fixed manufacturing overhead cost incurred	$	2,047,500

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

Solution:

Part 1 -- predetermined overhead rate for the year

	$$
Budgeted variable manufacturing overhead	$4.60	Per Direct Labor Hour
Plus: Budgeted Fixed Manufacturing Overhead ($1,935,000 / 225,000)	$8.60	Per Direct Labor Hour
Predetermined Overhead Rate	$13.20	Per Direct Labor Hour

Part 2 – Standard Cost Card

	Standard Unit Cost
Direct Materials (4 pounds x $9.50)	$38.00
Direct Labor Costs (1.5 hours x $13.30)	$19.95
Applied Manufacturing Overhead (1.5 Hrs x $13.20)	$19.80
Unit Standard Cost	$77.75

Part 3a –

Standard direct labor-hours allowed for the year’s production = Actual Units Produced 180,000 x Std direct labor hours per unit 1.5 hours

= 270,000 Hours

Part 3b – Manufacturing Overhead T-account

Manufacturing Overhead
	Debit	Credit
Actual variable manufacturing overhead cost incurred	$789,750	$3,861,000	Applied Manufacturing Overhead (292,500 Hrs x $13.20)
Actual fixed manufacturing overhead cost incurred	$2,047,500
		$1,023,750	Over Applied Overhead

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