Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. The budgeted variable manufacturing overhead is $4.40 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,764,000 per year. 

The standard quantity of materials is 4 pounds per unit and the standard cost is $9.00 per pound. The standard direct labor- hours per unit is 1.5 hours and the standard labor rate is $13.20 per hour. 

The company planned to operate at a denominator activity level of 210,000 direct labor-hours and to produce 140,000 units of product during the most recent year. Actual activity and costs for the year were as follows: 

Actual number of units produced	168,000
Actual direct labor-hours worked	273,000
Actual variable manufacturing overhead cost incurred	$709,800
Actual fixed manufacturing overhead cost incurred	$1,911,000

 

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

1) Predetermined Overhead rate = 4.40 + (1,764,000/210,000) = 12.8 Per DLH

Variable Rate = 4.40 Per DLH

Fixed Rate = 8.40 Per DLH

2)

Direct Materials	4.00	Pounds at	9.00	Per Pound	36.00
Direct Labor	1.50	DLHs at	13.20	Per DLH	19.80
Variable Overhead	1.50	DLHs at	4.40	Per DLH	6.60
Fixed Overhead	1.50	DLHs at	8.40	Per DLH	12.60
Standard cost per unit					75.00

3a) Standard Direct Labor Hours allowed = 168,000 x 1.5 = 252,000 Hours

3b)

Manufacturing Overhead
Actual Cost	2,620,800.00	3,225,600.00	Applied Cost
		604,800.00	Over-applied overhead

4)Variable Overhead rate Variance = 709,800 - (273,000 x 4.4) = 491,400 (F)

Variable overhead efficiency variance = (273,000 - 252,000) x 4.4 = 92,400 (U)

Fixed Overhead Budget Variance = 1,911,000 - 1,764,000 = 147,000 (U)

Fixed Overhead Volume Variance = (210,000 - 252,000) x 8.4 = 352,800 (F)