Question

Norwall Company's budgeted variable manufacturing overhead cost is $1.20 per machine-hour and its budgeted fixed manufacturing overhead is $105,966 per month. The following information is available for a recent month: a. The denominator activity of 33,640 machine-hours is used to compute the predetermined overhead rate. b. At a denominator activity of 33,640 machine-hours, the company should produce 11,600 units of product. c. The company's actual operating results were: Number of units produced Actual machine-hours Actual variable manufacturing overhead cost Actual fixed manufacturing overhead cost 12,060 35,050 $ 38,555 $ 105,000 Required: 1. Compute the predetermined overhead rate and break it down into variable and fixed cost elements. (Round your answers to 2 decimal places.) 2. Compute the standard hours allowed for the actual production. 3. Compute the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Solution

Norwall Company

1	Predetermined overhead rate	$4.35	per MH
	variable element	$1.20	per MH
	fixed element	$3.15	per MH
2	Standard hours allowed for the acutal production	34,974	MHs
3	variances -
	Variable overhead rate variance	$3,505	F
	Variable overhead efficiency variance	$91.20	U
	Fixed overhead budget variance	$966	F
	Fixed overhead volume variance	$4,202	F

Computations:

1. Determination of predetermined overhead rate:

Predetermined overhead rate = variable overhead rate + (estimated fixed overhead/estimated machine hours)

Variable overhead rate = $1.20

Estimated fixed manufacturing overhead per month = $105,966

Estimated machine hours = 33,640

Predetermined overhead rate = $1.20 + (105,966/33,640) = 1.20 + 3.15 = $4.35

Predetermined overhead rate = $4.35

• Variable element = $1.20
• Fixed cost element = $3.15

2. Computation of standard hours allowed for actual production:

Standard hours allowed for actual production = standard hours per unit x actual production

Standard hours per unit = 33,640/11,600 units = 2.9 hours per unit

Actual production = 12,060

Standard hours allowed for actual production = 2.9 x 12,060 = 34,974

3. Computation of the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances:

Variable overhead rate and efficiency variances –

Variable overhead rate variance = (actual rate – standard rate) x actual hours

Actual rate = actual variable manufacturing overhead cost/actual machine hours

= $38,555/35,050 = $1.10

Standard rate = $1.20

Actual hours = 35,050

Variable overhead rate variance = ($1.10 - $1.20) x 35,050 = $3,505 F

Variable overhead efficiency variance –

Variable overhead efficiency variance = (actual hours – standard hours for actual production) x standard rate

= (35,050 – 34,974) x $1.20 = $91.20 U

Fixed overhead budget variance –

Fixed overhead budget variance = actual fixed overhead – budgeted fixed overhead

Actual fixed overhead = $105,000

Budgeted fixed overhead = $105,966

Fixed overhead budget variance = 105,000 – 105,966 = $966 F

Fixed overhead volume variance = budgeted fixed overhead – standard overhead at actual output

Budgeted fixed overhead = $105,966

Standard overhead at actual output = $3.15 x 34,974 = $110,168

Fixed overhead volume variance = 105,966 – 110,168 = $4,202 F