Question

The Chuba Corporation uses a standard cost system in which manufacturing overhead is applied on the basis of standard direct labor-hours (DLHs). During December, the company actually used 7,200 direct labor-hours and made 1,900 units of finished product. The standard cost card for one unit of product includes the following data concerning manufacturing overhead:

Variable overhead: 4 DLHs @ $5.25 per DLH

Fixed overhead: 4 DLHs @ $2.00 per DLH

For December, the company incurred $16,550 in fixed manufacturing overhead costs and recorded an $800 unfavorable volume variance.

The denominator activity level in direct labor-hours used by Chuba in setting the predetermined overhead rate was:

Multiple Choice

A)7,600 hours

B)7,800 hours

C)8,000 hours

D)7,200 hours

Answer 1

Fixed manufacturing overhead volume variance = Standard fixed manufacturing overhead - Budgeted fixed manufacturing overhead

- 800 = 1900*4*$2 - Budgeted fixed manufacturing overhead

Budgeted fixed manufacturing overhead = $16000

Predetermined overhead rate = Budgeted fixed manufacturing overhead / Budgeted direct labor-hours

2 = $16000 / Budgeted direct labor-hours

Budgeted direct labor-hours = 8000 hours

Option C. is correct answer.