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.
1 any cost item be given special attention Explain 2. 3 Moleno Company produces a single product ...
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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 $2.60 per direct labor-hour and the
budgeted fixed manufacturing overhead is $495,000 per year.
The standard quantity of materials is 4 pounds per unit and the
standard cost is $4.50 per pound. The standard direct labor-hours
per unit is 1.5 hours and the standard labor rate is $12.30 per...
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