Question

Exercise 24-12 Byrd Company produces one product, a putter called GO-Putter. Byrd uses a standard cost system and determines that it should take one hour of direct labor to produce one GO-Putter. The normal production capacity for this putter is 120,000 units per year. The total budgeted overhead at normal capacity is $840,000 comprised of $360,000 of variable costs and $480,000 of fixed costs. Byrd applies overhead on the basis of direct labor hours. During the current year, Byrd produced 87,000 putters, worked 98,700 direct labor hours, and incurred variable overhead costs of $152,250 and fixed overhead costs of $556,000. Compute the predetermined variable overhead rate and the predetermined fixed overhead rate. (Round answers to 2 decimal places, e.g. 2.75.) Variable Fixed Predetermined Overhead Rate LINK TO TEXT LINK TO VIDEO Compute the applied overhead for Byrd for the year. Overhead Applied LINK TO TEXT LINK TO VIDEO Compute the total overhead variance. Total Overhead Variance

Answer 1

Predetermined overhead rate

Predetermined overhead rate is rate on which overheads are absorbed /recovered. Selection of overhead absorption rate is matter of judgement. Overhead can be absorbed on the basis of material, direct labor hours, output.

Here, it's mentioned to absorb overhead on direct labor hours

1 direct labor hour for producing one unit

So, 120,000 units will require 120,000 direct labor hours

Predetermined variable overhead rate

Given budgeted variable overhead cost is $360,000

so,

Predetermined variable overhead rate = Budgeted variable overhead cost / Budgeted direct labor hours

= $360,000/120,000

= $3 per direct labor hour

Predetermined fixed overhead rate

Given budgeted fixed overhead cost is $480,000

so,

Predetermined fixed overhead rate = Budgeted fixed overhead cost/ Budgeted direct labor hours

=$480,000/120,000

=$4 per direct labor hour

Applied overhead

Applied overhead is overhead absorbed using the predetermined rate

Applied variable overhead = predetermined variable overhead rate * Actual direct labor hours

= $3*98,700

=$296,100

Applied fixed overhead= predetermined fixed overhead rate * Actual direct labor hours

=$4*98,700

=$394,800

Total applied overhead = Applied variable overhead + Applied fixed overhead

=$296,100+$394,800

=$690,900

Total overhead variance

Total overhead variance shows difference between Applied overhead costs and actual overhead costs. If overhead applied is more than actual overhead then it represents over absorbed overhead. If overhead applied is less than actual overhead then it represents under absorbed overhead

In this case ,

Actual total overhead costs = Actual variable overhead costs + Actual fixed overhead costs

=$152,250+$556,000

=$708,250

Total overhead variance = Total applied overhead costs - Actual total overhead costs

=$690,900-$708,250

=$17,350 ( under absorbed )

It represents that overheads are under absorbed or variance is unfavorable