Question

Problem 10A-8 Applying Overhead; Overhead Variances (LO10-3, LO10-4] 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 $3.00 per direct labor-hour and the budgeted fixed manufacturing overhead is $735,000 per year. The standard quantity of materials is 4 pounds per unit and the standard cost is $5.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12.50 per hour. The company planned to operate at a denominator activity level of 105,000 direct labor-hours and to produce 70,000 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 84,000 136,500 $ 259,350 $ 750, 750 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

Answer 1

Solution 1:

Predetermined overhead rate for the year = Budgeted overhead / Budgeted labor hours

= [(105000*$3) + $735,000) / 105000 = $10 per direct labor hour

Variable overhead rate per labor hour = $3

Fixed overhead rate per labor hour = $7

Solution 2:

Standard cost Card - Lane Company
Particulars	Qty		Rate		Per unit
Direct material	4	Pound at	$5.50	Per Pound	$22.00
Direct labor	1.5	DLHs at	$12.50	Per DLH	$18.75
Variable overhead	1.5	DLHs at	$3.00	Per DLH	$4.50
Fixed overhead	1.5	DLHs at	$7.00	Per DLH	$10.50
Standard cost per unit					$55.75

Solution 3a:

standard direct labor-hours allowed for the year’s production = 84000*1.50 = 126000 hours

Solution 3b:

Manufacturing overhead - Lane Company
Particulars	Debit	Particulars	Credit
Variable overhead incurred	$259,350.00	Applied overhead (84000*1.5*$10)	$1,260,000.00
Fixed overhead incurred	$750,750.00
Overapplied overhead	$249,900.00
Total	$1,260,000.00	Total	$1,260,000.00

Solution 4:

Actual rate of variable overhead = $259,350 / 136500 = $1.90 per labor hour

Variable overhead rate variance = (SR - AR) * AH = ($3 - $1.90) * 136500 = $150,150 F

Variable overhead efficiency variance = (SH - AH) *SR = (126000 - 136500) * $3 = $31,500 U

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead = $735,000 - $750,750 = $15,750 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead = (126000*$7) - $735,000

= $147,000 F