Question

Morton Company’s budgeted variable manufacturing overhead is $1.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $336,000 per year.

The company manufactures a single product whose standard direct labor-hours per unit is 1.5 hours. The standard direct labor wage rate is $20 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $8 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:

1. Assume that the company chooses 30,000 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 40,000 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 as outlined below.

4. Assume that the company actually produces 22,000 units and works 39,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	65,400
Fixed manufacturing overhead cost		345,200
Total manufacturing overhead cost	$	410,600

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 1:

Morton company
(Assuming 30000 labor hours)
Budgeted variable manufacturing overhead ($1.50*30000)	$45,000.00
Budgeted fixed manufacturing overhead	$3,36,000.00
Total Manufacturing overhead	$3,81,000.00
/Budgeted direct labor hours	30000
Predetermined overhead rate	$12.70
Less: Variable overhead rate (Per direct labor hour)	$1.50
Fixed manufacturing overhead rate (per direct labor hour)	$11.20

Solution 2:

Morton company
(Assuming 40000 labor hours)
Budgeted variable manufacturing overhead ($1.50*40000)	$60,000.00
Budgeted fixed manufacturing overhead	$3,36,000.00
Total Manufacturing overhead	$3,96,000.00
/Budgeted direct labor hours	40000
Predetermined overhead rate	$9.90
Less: Variable overhead rate (Per direct labor hour)	$1.50
Fixed manufacturing overhead rate (per direct labor hour)	$8.40

Solution 3:

Standard Cost Card
	Denominator Activity
	30000 DLHs	40000 DLHs
Direct Material (2*$8)	$16.00	$16.00
Direct labor (1.5*$20)	$30.00	$30.00
Variable manufacturing overhead (1.5*$1.5)	$2.25	$2.25
Fixed manufacturing overhead (1.5* Rate)	$16.80	$12.60
Total Standard cost per unit	$65.05	$60.85

Solution 4-a:

Standard direct labor-hours allowed = 22000* 1.5 = 33000 hours

Solution 4-b:

Manufacturing Overhead
Particulars	Debit	Particulars	Credit
To Cash (Variable manufacturing overhead)	$65,400.00	By WIP (Applied overhead) (33000*$12.70)	$4,19,100.00
To Cash (Fixed manufacturing overhead)	$3,45,200.00
To overhead variance (Overapplied overhead)	$8,500.00
Total	$4,19,100.00	Total	$4,19,100.00

Solution 4-c:

Variable overhead actual rate = $65400/ 39000 = $1.676923 per hour

Variable overhead rate variance = (SP - AP) *Actual Hours = ($1.50 - $1.676923) *39000 = - $6900 Unfavorable

Variable overhead Efficiency variance = (Standard hours - Actual Hours) *SP = (33000 - 39000)*$1.50 = - $9000 (Unfavorable)

Fixed overhead budget Variance = Budgeted Fixed Overhead - Actual Fixed overhead = $336000 - $345200 = -$9200 (unfavorable)

Fixed Overhead Volume Variance = ($11.20*33000) - $336000 = $33,600 Favorable

Total Overapplied overhead = $8500