Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. The budgeted variable manufacturing overhead is $5.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $2,880,000 per year. The standard quantity of materials is 4 pounds per unit and the standard cost is $12.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.80 per hour. The company planned to operate at a denominator activity level of 300,000 direct labor-hours and to produce 200,000 units of product during the most recent year. Actual activity and costs for the year were as follows: Actual number of units produced Actual direct labor-hours worked Actual variable manufacturing overhead cost incurred Actual fixed manufacturing overhead cost incurred 240,000 390,000 $1,248,000 $3,120,000 Required: 1. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements. 2. Prepare a standard cost card for the company's product. 3a. Compute the standard direct labor-hours allowed for the year's production. 3b. Complete the following Manufacturing Overhead T-account for the year. 4. Determine the reason for any 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

Part 1

Predetermined overhead rate	$15.20
Variable rate	$5.60
Fixed rate	$9.60

Fixed rate = 2880000/300000 = 9.60

Part 2

Direct materials	4	Pounds at	$12	Per pound	$48.00
Direct labor	1.5	DLHs at	$13.80	Per DLH	20.70
Variable overhead	1.5	DLHs at	$5.60	Per DLH	8.40
Fixed overhead	1.5	DLHs at	$9.60	Per DLH	14.40
					$91.50

Part 3 a

Standard direct labor hours

360000

240000*1.5 = 360000

Part 3 b

Manufacturing overhead
Actual costs	4368000	5472000	Applied costs
		1104000	Overapplied overhead

1248000+3120000 = 4368000

Applied costs = 360000*15.20 = 5472000

Part 4

Variable overhead rate variance	$936000	F
Variable overhead efficiency variance	$168000	U
Fixed overhead budget variance	$240000	U
Fixed overhead volume variance	$576000	F

Variable overhead rate variance = actual overhead –(AH*SR) = 1248000-(390000*5.60)) = -936000

Variable overhead efficiency variance = SR*(AH-SH) = 5.60*(390000-360000) = 168000

Fixed overhead budget variance = actual overhead – budgeted overhead = 3120000-(300000*9.60) = 240000

Fixed overhead volume variance = (300000*9.60)-(360000*9.60) = -576000