Question

Problem 10A-12 Selection of a Denominator; Overhead Analysis; Standard Cost Card [LO10-3, LO10-4]

Morton Company’s budgeted variable manufacturing overhead is $2.50 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 3.5 hours. The standard direct labor wage rate is $20 per hour. The standards also allow 4 feet of raw material per unit at a standard cost of $4 per foot.

Although normal activity is 75,000 direct labor-hours each year, the company expects to operate at a 60,000-hour level of activity this year.

Required:

1. Assume that the company chooses 60,000 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 75,000 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 60,000 & 75,000 DLHs.

4. Assume that the company actually produces 19,000 units and works 67,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	168,900
Fixed manufacturing overhead cost		335,600
Total manufacturing overhead cost	$	504,500

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 60,000 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 60,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in requirement (1).

Assume that the company chooses 60,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. (Round your answers to 2 decimal places.)

	Predetermined overhead rate per DLH Variable element per DLH Fixed element per DLH

Assume that the company chooses 75,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. (Round your answers to 2 decimal places.)

	Predetermined overhead rate per DLH Variable element per DLH Fixed element per DLH

Complete two standard cost cards Complete two standard cost cards for 60,000 & 75,000 DLHs. (Round your answers to 2 decimal places.)

	Denominator Activity: 60,000 DLHs 75,000 DLHs Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total standard cost per unit

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

	Standard hours allowed for this year's production

Complete the Manufacturing Overhead T-account below. Assume that the company uses 60,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in requirement (1).

	Manufacturing Overhead 0

Assume that the company uses 60,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in requirement (1). (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Variable overhead rate variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance overhead $0

Answer 1

1.

Predetermined overhead rate ($2.50 + $5.50)	$          8.00	per DLH
Variable element	$          2.50	per DLH
Fixed element ($330000/60000)	$          5.50	per DLH

2.

Predetermined overhead rate ($2.50 + $4.40)	$          6.90	per DLH
Variable element	$          2.50	per DLH
Fixed element ($330000/75000)	$          4.40	per DLH

3.

	Activity
	60,000 DLH	75,000 DLH
Direct materials (4 ft x $4)	16.00	16.00
Direct labor (3.5 DLH x $20)	70.00	70.00
Variable manufacturing overhead (3.5 DLH x $2.50)	8.75	8.75
Fixed manufacturing overhead (3.5 x $5.50);(3.5 x $4.40)	19.25	15.40
Total standard cost per unit	114.00	110.15

4a. Standard direct labor-hours allowed = 19000 units x 3.5 DLH = 66500 DLH

4b.

Manufacturing Overhead
Actual costs	168900	532000	Applied costs
Actual costs	335600
		27500	Overapplied overhead

Applied costs = 66500 x $8 = $532000

4c.

Variable overhead rate variance	1400	U
Variable overhead efficiency variance	1250	U
Fixed overhead budget variance	5600	U
Fixed overhead volume variance	35750	F
Overapplied overhead	27500	F

Working:

Variable overhead rate variance = (AH x AR) - (AH x SR) = $168900 - (67000 x $2.50) = $168900 - $167500 = $1400 U

Variable overhead efficiency variance = (SR x AH) - (SR x SH) = $167500 - ($2.50 x 66500) = $167500 - $166250 = $1250 U

Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead = $335600 - $330000 = $5600 U

Fixed overhead volume variance = Budgeted fixed overhead - Fixed overhead applied = $330000 - (66500 x $5.50) = $330000 - $365750 = $35750 F