Question

Morton Company's budgeted variable manufacturing overhead is $3.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $400,000 per year. The company manufactures a single product whose standard direct labor-hours per unit is 2.0 hours. The standard direct labor wage rate is $15 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $5 per foot. Although normal activity is 50,000 direct labor-hours each year, the company expects to operate at a 40,000-hour level of activity this year. Required: 1. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. 2. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. 3. Complete two standard cost cards for 40,000 & 50,000 DLHs. 4. Assume that the company actually produces 21,400 units and works 45,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are: Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost $ 165, 100 401,000 $ 566,100 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 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above. C. Assume that the company uses 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in requirement (1).

Answer 1

Solution 1, 2 and 3:

УК 2800 solution 2: Morton company (Assuming 50000 labor hours) Budgeted variable manufacturing overhead ($3.50*50000) Add: Budgeted fixed manufacturing overhead Solution 1: Morton company (Assuming 40000 labor hours) Budgeted variable manufacturing overhead ($3.50*40000) Add: Budgeted fixed manufacturing overhead $175,000 $400,000 $140,000 $400,000 8 9 10 Total Manufacturing overhead /Budgeted direct labor hours $575,000 50000 11 Total Manufacturing overhead /Budgeted direct labor hours $540,000 40000 12 Predetermined overhead rate $11.50 Predetermined overhead rate $13.50 13 14 $3.50 $3.50 Less: Variable overhead rate (Per direct labor hour) Fixed manufacturing overhead rate (per direct labor hour) 15 $8.00 Less: Variable overhead rate (Per direct labor hour) Fixed manufacturing overhead rate (per direct labor hour) SOLUTION 3: Standard Cost Card $10.00 16 17 18 19 20 Denominator Activity 40000 DLHS 50000 DLHS $10.00 $10.00 $30.00 $30.00 $7.00 $7.00 $20.00 $16.00 Direct Material (2 feet*$5) Direct labor (2 hours $15) Variable manufacturing overhead (2 hours $3.50) Fixed manufacturing overhead (2 hours* Rate) 21 33000 23 24 Total Standard cost per unit $67.00 $63.00 25 26 28 29 -390 (5) Sheet667 Sheet230 (9) Sheet713 Sheet161 (6) Sheet722 Sheet713 (2) ) Sheet731

Solution 4a:

Standard hours allowed = 21400 units *2 hours = 42800 hours

Solution 4b:

3 Particulars Actual costs incurred Manufacturing Overhead Debit Particulars Credit $566,100 $577,800.00 Applied overhead (42800*$13.50)| 10 11 12 To overhead variance (Overapplied overhead) $11,700 13 14 Total $577,800 $577,800.00 Total 15 17 18 19 20 21 22 23 24 -390 (5) Sheet667 Sheet230 (9) Sheet713 Sheet161 (6) Sheet722 Sheet713 (2) ) Sheet731

Solution 4c:

Variable overhead actual rate = $165100/ 45000 = $3.668889 per hour

Variable overhead rate variance = (SP - AP) *Actual Hours = ($3.50 - $3.668889) *45000 = $7600 Unfavorable

Variable overhead Efficiency variance = (Standard hours - Actual Hours) *SP = (42800 - 45000)*$3.50 = $7700 (Unfavorable)

Fixed overhead budget Variance = Budgeted Fixed Overhead - Actual Fixed overhead = $400000 - $401000 = $1000 (unfavorable)

Fixed Overhead Volume Variance = ($10*42800) - $400000 = $28000 Favorable

Overapplied overhead = $11700