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 $5.20 per direct labor-hour and the budgeted fixed manufacturing overhead is $2,484,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $11.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.60 per hour.

The company planned to operate at a denominator activity level of 270,000 direct labor-hours and to produce 180,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		216,000
Actual direct labor-hours worked		351,000
Actual variable manufacturing overhead cost incurred	$	1,053,000
Actual fixed manufacturing overhead cost incurred	$	2,808,000

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
Variable Manufacturing Overhead	$ 5.20 per DLH
Fixed Manufacturing Overhead	9.20 per DLH
Total Manufacturing Overhead	$ 14.4 per DLH

2.

Cost Item	Volume per Unit	Rate	Cost
Direct Materials	4 pounds	$ 11 per pound	$ 44.00
Direct Labor	1.5 hours	13.60 per hour	20.40
Variable Manufacturing Overhead	1.5 hours	5.20 per hour	7.80
Fixed Manufacturing Overhead	1.5 hours	9.20 per hour	13.80
		Total Standard Cost per Unit	$ 86.00

3.a. Standard labor hours allowed for the year's production = 216,000 units x 1.5 hours = 324,000 direct labor hours

3.b.

Manufacturing Overhead
Actual Variable Manufacturing Overhead	$ 1,053,000	Applied Variable Manufacturing Overhead	$ 1,825,200
Actual Fixed Manufacturing Overhead	2,808,000	Applied Fixed Manufacturing Overhead	3,229,200
Overapplied	1,193,400

4. Variable overhead rate variance = $ ( 5.20 - 3.00 ) x 351,000 = $ 772,200 F

Variable overhead efficiency variance = ( 324,000 - 351,000 ) x $ 5.20 = $ 140,400 U

Fixed overhead budget variance = $ 2,484,000 - $ 2,808,000 = $ 324,000 U

Fixed overhead volume variance = ( 270,000 - 351,000 ) x $ 9.20 = $ 745,200 F