Question

Lane Company manufactures a single product and applies overhead cost to that product using standard direct labor-hours. The budgeted variable manufacturing overhead is $3.40 per direct labor hour and the budgeted fixed manufacturing overhead is $999.000 per year. The standard quantity of materials is 4 pounds per unit and the standard cost is $6.50 per pound. The standard direct labor-hours per unit is 15 hours and the standard labor rate is $12.70 per hour. The company planned to operate at a denominator activity level of 135.000 direct labor-hours and to produce 90,000 units of product during the most recent year. Actual activity and costs for the year were as follows: Actual number of units produced hetual direct laborehours worked hetual variable manufacturing overhead eost neurred Metalfixed sufacturing overhead coat incurred 175,500 $ 168,550 $1.051.000 Required: 1. Compute the predetermined overhead rate for the year Break the rate down into variable and fixed elements 2. Prepare a standard cost card for the company's product 3a. Compute the standard direct labor hours allowed for the year's production 3b. Complete the following Manufacturing Overhead T-account for the year. 4. Determine the reason for any underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the faced overhead budget and volume variances.

Answer 1

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

Variable manufacturing overhead per Direct Labor Hour (DLH)	3.40
Predetermined fixed manufacturing overhead rate per DLH (999,000/135,000 hrs)	7.40
Total Predetermined Overhead rate (3.4+7.4)	10.80

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	$6.50 per pound	26.00 per unit
Direct labor	1.5 DLHs	$12.70 per DLH	19.05 per unit
Variable overhead	1.5 DLHs	$3.40 per DLH	5.10 per unit
Fixed overhead	1.5 DLHs	$7.40 per DLH	11.10 per unit
Standard Cost			61.25 per unit

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

= 108,000 units*1.5 direct labor hrs per unit = $162,000 hrs

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

Manufacturing Overhead
Actual costs (368,550+1,053,000)	1,421,550	1,749,600	Applied Costs [108,000 units*($5.10+$11.10)]
		328,050	Overapplied Overheads (1,895,400-1,421,550)

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

= (175,500*$3.40) - $368,550 = $228,150 F

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

= [(108,000 units*1.5)*$3.40] - (175,500*$3.40)

= $550,800 - $596,700 = $45,900 U

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

= $999,000 - $1,053,000 = $54,000 U

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

= [(999,000/90,000 units)*108,000 units] - $999,000

= $1,198,800 - $999,000 = $199,800 F

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