Question

Morton Company’s budgeted variable manufacturing overhead is $3.00 per direct labor-hour and its budgeted fixed manufacturing overhead is $300,000 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 $20 per hour. The standards also allow 3 feet of raw material per unit at a standard cost of $4 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:

4. Assume that the company actually produces 17,000 units and works 37,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	112,500
Fixed manufacturing overhead cost		301,500
Total manufacturing overhead cost	$	414,000

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. Determine the cause of the 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

Solution 4a:

Standard driect labor hours allowed for actual production = 17000*2 = 34000 hours

Solution 4b

Manufacturing Overhead
Particulars	Debit	Particulars	Credit
Variable manufacturing overhead	$112,500.00	Overhead applied (34000*$13)	$442,000.00
Fixed manufacturing overhead	$301,500.00
Overapplied overhead	$28,000.00
Total	$442,000.00	Total	$442,000.00

Solution 4c:

Actual variable overhead rate = $112,500 / 37000 = $3.04055 per hour

Variable overhead rate variance = (SR - AR) * AH = ($3 - $3.04055) * 37000 = $1,500 U

Variable overhead efficiency variance = (SH - AH) * SR = (34000 - 37000) * $3 = $9,000 U

Fixed overhead budget variance = Budgeted fixed overhead - actual fixed overhead

= $300,000 - $301,500 = $1,500 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhad = $340,000 - $300,000 = $40,000 F