Question

Chilczuk, S.A., of Gdansk, Poland, is a major producer of classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the company’s planning budget, the following manufacturing overhead costs should be incurred at an activity level of 25,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost	$	112,500
Fixed manufacturing overhead cost		162,500
Total manufacturing overhead cost	$	275,000

During the most recent year, the following operating results were recorded:

Activity:
Actual labor-hours worked		22,000
Standard labor-hours allowed for the actual output		23,000
Cost:
Actual variable manufacturing overhead cost incurred	$	129,800
Actual fixed manufacturing overhead cost incurred	$	143,750

At the end of the year, the company’s Manufacturing Overhead account contained the following data:

Manufacturing Overhead
Actual	273,550	Applied	253,000
	20,550

Management would like to determine the cause of the $20,550 underapplied overhead.

Required:

1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.

2. Show how the $253,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the $20,550 underapplied overhead into four components: (1) variable overhead rate variance, (2) variable overhead efficiency variance, (3) fixed overhead budget variance, and (4) fixed overhead volume variance.

1
	Predetermined overhead rate per hour Variable element per hour Fixed element per hour

2
	actual hours worked/standard hour sallowed ×    per hour =

3
	Variable overhead: Rate variance Efficiency variance Fixed overhead: Budget variance Volume variance

Answer 1

	1.)	Predetermined overhead rate per hour
		Predetermined overhead rate per hour	11.00	per hour	(275,000 / 25,000 )
		Variable Element	4.50	per hour	(112,500 / 25,000 )
		Fixed Element	6.50	per hour	(162,500 / 25,000 )
	2.)	Applied manufacturing overhead
		Apprlied manufacturing overhead = Standard labor Hour x Predetermined overhead rate
		= 23,000 x 11
		= $ 253,000
	3.)
	(i)	Variable overhead rate variance   = ( Actual Rate - Standard rate ) x actual hours
		= ( (129,800 / 22,000 ) - 4.50 ) x 22,000
		= ( 5.90 - 4.50 ) x 22,000
		= 30,800 U
	(ii)	Variable overhead efficiency        = ( Actual Hours - Standard hours ) x Standard rate
		= ( 22,000 - 23,000 ) x 4.50
		= -1,000 x 4.50
		= -$ 4,500 F
	(iii)	Fixed Overhead Budget variance = Actual Fixed overhead - Flexible Budget Fixed Overhead
		= 143,750 - ( 22,000 x 6.5)
		= 143,750 - 143,000
		= 750 U
	(iv)	Fixed Overhead volume variance = Flexible Budgeted Fixed Overhead - Applied Fixed Overhead
		= 143,000 - (23,000 x 6.50 )
		= 143,000 - 149,500
		= -$ 6,500 F
		Unfavorable Variable overhead rate variance	30,800
		Favorable Variable overhead efficiency variance	- 4,500
		Unfavorable Fixed overhead budget variance	750
		Favorable Fixed overhead volume variance	- 6,500
		Underapplied Overhead	20,550