Question

Morton Company’s budgeted variable manufacturing overhead is $2.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $180,000 per year.

The company manufactures a single product whose standard direct labor-hours per unit is 2.5 hours. The standard direct labor wage rate is $10 per hour. The standards also allow 3 feet of raw material per unit at a standard cost of $7 per foot.

Although normal activity is 60,000 direct labor-hours each year, the company expects to operate at a 50,000-hour level of activity this year.

4. Assume that the company actually produces 21,200 units and works 54,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Variable manufacturing overhead cost	$	136,000
Fixed manufacturing overhead cost		181,500
Total manufacturing overhead cost	$	317,500

a. Compute the standard direct labor-hours allowed for this year’s production.

b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 50,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.

c. Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.

Req 3 Req 4A Req 4C Req 1 Compute the standard direct labor-hours allowed for this year's production. Standard hours allowed for this year's production Req 2 Req 4B Req 1 Req 2 Req 3 Req 4A Req 4B Req 4C Complete the Manufacturing Overhead T-account below. Assume that the company uses 50,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above. Manufacturing Overhead 317,500 Req 4A Req 4C Req 1 Req 2 Req 3 Req 4A Req 4B Req 4C Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (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.) Variable overhead rate variance Variable overhead efficiency variance Fixed overhead budget variance Fixed overhead volume variance overhead Req 4B Req 4C

Answer 1

Solution 4a:

standard direct labor-hours allowed for the year’s production = 21200*2.50 =53000 hours

Solution 4b:

Manufacturing overhead - Morton Company
Particulars	Debit	Particulars	Credit
Variable overhead incurred	$136,000.00	Applied overhead (21200*2.5*$6.10)	$323,300.00
Fixed overhead incurred	$181,500.00
Overapplied overhead	$5,800.00
Total	$323,300.00	Total	$323,300.00

Solution 4c:

Actual rate of variable overhead = $136,000 / 54000 = $2.51852 per labor hour

Variable overhead rate variance = (SR - AR) * AH = ($2.50 - $2.51852) * 54000 = $1,000 U

Variable overhead efficiency variance = (SH - AH) *SR = (53000 - 54000) * $2.50 = $2,500 U

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead = $180,000 - $181,500 = $1,500 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead = (53000*$3.60) - $180,000

= $10,800 F