Question

Primara Corporation has a standard cost system in which it applies overhead to products based on the standard direct labor-hours allowed for the actual output of the period. Data concerning the most recent year appear below: Total budgeted fixed overhead cost for the year Actual fixed overhead cost for the year Budgeted direct labor-hours (denominator level of activity) Actual direct labor-hours Standard direct labor-hours allowed for the actual output $ 473,600 $ 467,000 64,000 65,000 62,000 Required: 1. Compute the fixed portion of the predetermined overhead rate for the year. (Round Fixed portion of the predetermined overhead rate to 2 decimal places.) 2. Compute the fixed overhead budget variance and volume variance. (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.) per DLH 1. Fixed portion of the predetermined overhead rate 2. Budget variance Volume variance

Answer 1

Ques A

1) Fixed portion of Predetermined overhead rate = Total budgeted fixed overhead/Budgeted DLHs

= $473,600/64,000 = $7.40 per hour

Therefore the fixed portion of the predetermined overhead rate for the year is $7.40 per hour.

2) Fixed Overhead Budget Variance = Budgeted Fixed Overhead - Actual Fixed Overhead

= $473,600 - $467,000 = $6,600 Favorable

Fixed Overhead Volume Variance

= (Std labor hrs for actual output - Budgeted labor hrs)*Predetermined OH rate

= (62,000 - 64,000)*$7.40 per hr = $14,800 Unfavorable

Ques B

1) Calculation of Predetermined Overhead Rate (Amounts in $)

Variable manufacturing overhead per Direct Labor Hour (DLH)	3.00
Predetermined fixed manufacturing overhead rate per DLH (735,000/105,000 hrs)	7.00
Total Predetermined Overhead rate (3.0+7.0)	10.00

2) Standard Cost Card for the Company's product (Amounts in $)

	Qty/Hrs (a)	Cost per unit of Qty or per hour (b)	Total cost per unit (a*b)
Direct materials	4 pounds	$5.50 per pound	22.00 per unit
Direct labor	1.5 DLHs	$12.50 per DLH	18.75 per unit
Variable overhead	1.5 DLHs	$3.00 per DLH	4.50 per unit
Fixed overhead	1.5 DLHs	$7.00 per DLH	10.50 per unit
Standard Cost			55.75 per unit

3) a) Standard direct labor hours allowed = Actual units*Direct labor hrs per unit

= 84,000 units*1.5 direct labor hrs per unit = $126,000 hrs

3) b) Manufacturing Overhead T-account for the year (Amounts in $)

Manufacturing Overhead
Actual costs (259,350+750,750)	1,010,100	1,260,000	Applied Costs [84,000 units*($4.50+$10.50)]
		249,900	Overapplied Overheads (1,260,000-1,010,100)

4) Variable Overhead Rate Variance = (Actual hours*Std rate per hour) - Actual variable overhead

= (136,500*$3.00) - $259,350 = $150,150 F

Variable Overhead Efficiency Variance = (Std hrs*Std rate) - (Actual hrs*Std rate)

= [(84,000 units*1.5)*$3.00] - (136,500*$3.00)

= $378,000 - $409,500 = $31,500 U

Fixed Overhead Budget Variance = Budgeted Fixed Overhead - Actual Fixed Overhead

= $735,000 - $750,750 = $15,750 U

Fixed Overhead Volume Variance = Applied Fixed Overhead - Budgeted Fixed Overhead

= [(735,000/70,000 units)*84,000 units] - $735,000

= $882,000 - $735,000 = $147,000 F

The overheads are overapplied because fixed overhead volume variance and variable overhead rate variance is favorable.