Question

Morton Company’s budgeted variable manufacturing overhead is $1.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $330,000 per year.

The company manufactures a single product whose standard direct labor-hours per unit is 2.0 hours. The standard direct labor wage rate is $30 per hour. The standards also allow 3 feet of raw material per unit at a standard cost of $5 per foot.

Although normal activity is 40,000 direct labor-hours each year, the company expects to operate at a 30,000-hour level of activity this year.

Required:

1. Assume that the company chooses 30,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

2. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.

3. Complete two standard cost cards for 30,000 & 40,000 DLHs.

4. Assume that the company actually produces 18,000 units and works 38,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	62,500
Fixed manufacturing overhead cost		335,400
Total manufacturing overhead cost	$	397,900

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

b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 30,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.

c. Assume that the company uses 30,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in requirement (1).

Answer 1

1.

Morton company
(Assuming 30000 labor hours)
Budgeted variable manufacturing overhead ($1.50*30000)	$45,000
Budgeted fixed manufacturing overhead	$3,30,000
Total Manufacturing overhead	$3,75,000
/Budgeted direct labor hours	30000
Predetermined overhead rate	$12.50
Less: Variable overhead rate (Per direct labor hour)	$1.50
Fixed manufacturing overhead rate (per direct labor hour)	$11.00

2.

Morton company
(Assuming 40000 labor hours)
Budgeted variable manufacturing overhead ($1.50*40000)	$60,000
Budgeted fixed manufacturing overhead	$3,30,000
Total Manufacturing overhead	$3,90,000
/Budgeted direct labor hours	40000
Predetermined overhead rate	$9.75
Less: Variable overhead rate (Per direct labor hour)	$1.50
Fixed manufacturing overhead rate (per direct labor hour)	$8.25

3.

Standard Cost Card
	Denominator Activity
	30000 DLHs	40000 DLHs
Direct Material (3*$5)	$15.00	$15.00
Direct labor (2 hours*$30)	$60.00	$60.00
Variable manufacturing overhead (2 hours*$1.5)	$3.00	$3.00
Fixed manufacturing overhead (2 hours*Fixed overhead Rate)	$22.00	$16.50
Total Standard cost per unit	$100.00	$94.50

4a:

standard direct labor-hours allowed = 18000*2 = 36000 hours

4b:

Manufacturing Overhead
Particulars	Debit	Credit	Particulars
Actual Overhead	$3,97,900	$4,50,000	By WIP (Applied overhead) (36000*$12.50)
To overhead variance (Overapplied overhead)	$52,100
Total	$4,50,000	$4,50,000	Total

4c:

Variable overhead actual rate = $62500/ 38000 = $1.644737 per hour

Variable overhead rate variance = (SR - AR) *Actual Hours = ($1.50- $1.644737) *38000 = -$5500 (Unfavorable)

Variable overhead Efficiency variance = (Standard hours - Actual Hours) *SR = (36000 - 38000)*$1.50 = - $3000 (Unfavorable)

Fixed overhead budget Variance = Budgeted Fixed Overhead - Actual Fixed overhead = $330000 - $335400 = -$5400 (unfavorable)

Fixed Overhead Volume Variance = ($11.00*36000) - $330000 =$466400 - 400000 = $66000 Favorable