Question

Lane Company manufactures a single product and applies overhead cost to that product using standard direct labor-hours. The budgeted variable manufacturing overhead is $4.80 per direct labor-hour and the budgeted fixed manufacturing overhead is $2,112,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $10.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.40 per hour.

The company planned to operate at a denominator activity level of 240,000 direct labor-hours and to produce 160,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		192,000
Actual direct labor-hours worked		312,000
Actual variable manufacturing overhead cost incurred	$	873,600
Actual fixed manufacturing overhead cost incurred	$	2,184,000

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

Asnwer:

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

Predetermined overhead rate	13.6	per DLH
Variable rate	4.8	per DLH
Fixed rate	8.8	per DLH

Working

Total rate:	$3,264,000	= $13.60 per DLH
Devided By	240,000 DLHs
Variable rate:	$1,152,000	= $4.80 per DLH
Devided By	240,000 DLHs
Fixed rate:	$2,112,000	= $8.80 per DLH
Devided By	240,000 DLHs

_________________________________________________________

2.

Prepare a standard cost card for the company’s product.

Direct materials	4	pounds at	$10.00	per pound	$40.00
Direct labor	1.5	DLHs at	$13.40	per DLH	20.1
Variable overhead	1.5	DLHs at	$4.80	per DLH	7.2
Fixed overhead	1.5	DLHs at	$8.80	per DLH	13.2
Standard cost per unit					$80.50

______________________________________________________________

3

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

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

=192,000 units × 1.5 DLHs per unit

= 288,000 standard DLHs.

___________________________________

3b. Complete the following Manufacturing Overhead T-account for the year.

Applied costs (288,000 standard DLHs × $13.60 per DLH)

= $3,916,800

Manufacturing Overhead
Actual costs	3,057,600	3,916,800	Applied costs
		859,200	Overapplied overhead

________________________________________________________

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.

variable overhead variance

Variable overhead rate variance	=	(AH × AR) ? (AH × SR)
($873,600) – (312,000 DLHs × $4.8 per DLH)	=	$624,000 F
Variable overhead efficiency variance	=	SR (AH ? SH)
$4.8 per DLH (312,000 DLHs – 288,000 DLHs)	=	$115,200 U

Actual Fixed			Budgeted Fixed			Fixed Overhead Applied to Work in Process
Overhead			Overhead
$2,184,000			$2,112,000*			288,000 DLHs ×
						$8.8 per DLH
						= $2,534,400
		Budget Variance,		Volume Variance,
		$72,000 U		$422,400 F

Variable overhead:
Rate variance	624,000	F
Efficiency variance	115,200	U
Fixed overhead:
Budget variance	72,000	U
Volume variance	422,400	F
Overapplied overhead—see part 3	859,200	F

Variable overhead rate variance	$624,000	F
Variable overhead efficiency variance	$115,200	U
Fixed overhead budget variance	$72,000	U
Fixed overhead volume variance	$422,400	F