Question

1 any cost item be given special attention Explain 2. 3 Moleno Company produces a single product and uses a standard cost system. The normal production volume 120,000 units; each unit requires five direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhcad for the coming year is as follows $2,160,000 440,000 FOH During the year, Moleno produced 118,600 units, worked 592,300 direct labor hours, and incurred actual fixed overhead costs of $2,150,400 and actual variable overhead costs of $1,422,800 Required: 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead 3. Conceptual Connection: Break down the total fiedoyerhead variance into a spending variance and a volume 4. Conceptual Connection: Compute 5. Journal entries fos Calculatc e andand fsucd uncriicad raic anú the standard vanabie overhead rate. variance? Total variable overhead variance variance. Discuss the significance of each significance of each variances were not discussed in this chapter. Typically, the overhead variance entries happen at the end of the year Asume that applied fixed (variable) overhead is accumulated on the credit side of the fixed (variable) o lated on the debit side of the account is the total fixed (varable variance. Create out the total variances to closed to Cost of Goods Sold ntr account Actual fixed (variable) overhead costs are accuma control ccounts. At the end of the year, the balance in eäch contro and e accounts. These four variance accounts are then usal our v

Answer 1

For this question, we define Standard conditions as: When normal volumes are produced in a year at budgeted overhead costs assuming standard labor hours per units ( i.e. 5 Direct Labor Hours).

Whereas, applied (actual) conditions take into account actual volumes at actual overhead costs and the actual direct labor hours required per unit.

Also, in this question, we need to find out overhead variance.We can find Overhead Costs Variance using the Formula: Overhead Costs Variance = Budgeted Overheads - Applied (or actual) Overheads....... (a)

1. As described above,

Standard Over head Rate = Budgeted Fixed Overhead/ No. of Units/ No. of Direct Labor Hours (per unit)

=2160000/120000/5 = $ 3.6/ unit/ hour

Similarly, Variable Overhead Rate = Budgeted Variable Overhead/ No. of units/ No. of Direct Labor Hours

= 1440000/120000/5 = $ 2.4/ unit/ hour

2. Using the description above, Applied overhead costs can be calculated as follows:

Applied Fixed Overhead Cost = Applied Fixed Overhead/ Actual No. of Units/ Actual no. of Direct Labor Hours (per unit)..(b)

For this we need to calculate actual number of direct labor hours/ unit. The value is = 592300/ 118600 = 4.994 hours/ unit.

Using this value in equation b, we get:

Applied Fixed Overhead Rate = 2150400/118600/4.994 = $ 3.63/ unit/ hour.

and Applied Variable Overhead Rate = 1422800/118600/4.994 = $ 2.402208/ unit/ hour

Using equation a, variance is calculated below:

Total Fixed Overhead Variance = 2160000 - 2150400 = 9600 $ (i.e. positive variance)

Total Variable Overhead Variance = 1440000 - 1422800 = 17200 $ (i.e. positive variance)

3. As we have seen in the part 2 above, Applied Fixed Overhead and Applied Variable Overhead Rate are higher than standard Fixed Overhead and Standard Variable Overhead Rate respectively, which shows that Applied Total Cost (Variable and Fixed) would have been higher as compared to Standard Total Cost, had the normal production (120000 units) been done at 5 labor hours/ unit. But since lesser production was done (118600 units) at 4.9904 labor hours/ unit, the total overhead variance turned out to be positive.