Question

Lansing Mfg. prepared the following annual abbreviated flexible budget for different levels of machine hours:

	40,000	44,000	48,000	52,000
Variable manufacturing overhead	$80,000	$88,000	$96,000	$104,000
Fixed manufacturing overhead	325,000	325,000	325,000	325,000

Each product requires four hours of machine time, and the company expects to produce 10,000 units for the year. Production is expected to be evenly distributed throughout the year.
a. Calculate separate predetermined variable and fixed OH rates using as the basis of application (1) units of production and (2) machine hours.
Note: Do not round your answers.

	Variable OH Rate	Fixed OH Rate
(1) Units of product
(2) Machine hours

b. Calculate the combined predetermined OH rate using (1) units of product and (2) machine hours.
Note: Do not round your answers.

	Combined Rate
(1) Units of product
(2) Machine hours

c. Assume that all actual overhead costs are equal to expected overhead costs for the year, but that Lansing Mfg. produced 11,000 units of product. If the separate rates based on units of product calculated in (a) were used to apply overhead, what amounts of underapplied or overapplied variable and fixed overhead exist at year-end?
Note: Do not use a negative sign with your answer.

Variable OH		OverappliedUnderappliedNeither over or under applied
Fixed OH		OverappliedUnderappliedNeither over or under applied

Lansing Mfg. prepared the following annual abbreviated flexible budget for different levels of machine hours:

	40,000	44,000	48,000	52,000
Variable manufacturing overhead	$80,000	$88,000	$96,000	$104,000
Fixed manufacturing overhead	325,000	325,000	325,000	325,000

Each product requires four hours of machine time and the company expects to produce 10,000 units for the year. Assume that Lansing Mfg. has decided to use units of production to apply overhead to production. In April of the current year, the company produced 900 units and incurred $7,500 and $26,500 of variable and fixed overhead, respectively.

a. What amount of variable manufacturing overhead should be applied to production in April?
Applied VOH $Answer

b. What amount of fixed manufacturing overhead should be applied to production in April?
Applied FOH $Answer

c. Calculate the under- or overapplied variable and fixed overhead for April.
Note: Do not use negative signs with your answers.

Variable OH		OverappliedUnderappliedNeither over- or underapplied
Fixed OH		OverappliedUnderappliedNeither over- or underapplied

Answer 1

Since the company expects to produce 10,000 units for the year and each unit requires four hours of machine time, therefore total hours of machine time is equal to 10,000 units* 4 hours per unit = 40,000 machine hours.

a)

Calculation of predetermined variable and fixed overheads on basis of (1) units of production

Variable overhead rate = Total Variable Overheads / Units of production

= $80,000 / 10,000 units

= $8 per unit

Fixed overhead rate = Total Fixed Overheads / Units of production

= $325,000 / 10,000 units

= $32.5 per unit

Calculation of predetermined variable and fixed overheads on basis of (2) Machine Hours

Variable overhead rate = Total Variable Overheads / Machine Hours

= $80,000 / 40,000 units

= $2 per unit

Fixed overhead rate = Total Fixed Overheads / Machine Hours

= $325,000 / 40,000 units

= $8.125 per unit

.

	Variable OH Rate	Fixed OH Rate
(1) Units of product	$8 per unit	$32.5 per unit
(2) Machine hours	$2 per unit	$8.125 per unit

b)

Calculation of Predetermined Combined Overhead Rate using (1) Units of Production

Predetermined Overhead Rate = Total Combined Overheads / Units of Production

= ($80,000 + $325,000) / 10,000 units

= $405,000 / 10,000 units

= $40.5 per unit

Calculation of Predetermined Combined Overhead Rate using (2) Machine Hours

Predetermined Overhead Rate = Total Combined Overheads / Machine Hours

= ($80,000 + $325,000) / 40,000 hours

= $405,000 / 40,000 hours

= $10.125 per unit

.

	Combined Rate
(1) Units of product	$40.5 per unit
(2) Machine hours	$10.125 per unit

c) Actual Overheads = Predetermined Overheads

Therefore applied Overheads as per rate calculated in (a) :

Variable Overheads = $8 per unit * 11,000 units = $88,000

Fixed Overheads = $32.5 per unit * 11,000 units = $357,500

While actual overheads were $80,000 and $325,000 respectively.(as given that actual overheads are equal to predetermined overheads)

Therefore, both variable and fixed overheads are over applied as applied overheads are more than actual overheads.

Over-applied variable overheads = $88,000 - $80,000 = $8,000

Over-applied fixed overheads = $357,500 - $325,000 = $32,500

For April:

Units Produced = 900 units

Actual Variable Overheads = $7,500

Actual Fixed Overheads = $26,500

Rate of applying overheads on basis of units of production:

Variable overhead rate = Total Variable Overheads / Units of production

= $80,000 / 10,000 units

= $8 per unit

Fixed overhead rate = Total Fixed Overheads / Units of production

= $325,000 / 10,000 units

= $32.5 per unit

a) Amount of variable manufacturing overheads to be applied

=Variable overhead rate * Actual Units Produced

= $8 per unit * 900 units

= $7,200

b) Amount of fixed manufacturing overheads to be applied

=Fixed overhead rate * Actual Units Produced

= $32.5 per unit * 900 units

= $29,250

c) Variable Overheads:

Applied = $7,200

Actual = $7,500

Since Actual is more than the applied overheads, it is the case of under applied overheads of $300 [$7,500 - $7,200]

Fixed Overheads

Applied = $29,250

Actual = $26,500

Since Actual is less than the applied overheads, it is the case of over applied overheads of $2,750 [$29,250 - $26,500]