Chilczuk, S.A., of Gdansk, Poland, is a major producer of classic Polish sausage

Question

Chilczuk, S.A., of Gdansk, Poland, is a major producer of classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the company's planning budget, the following manufacturing overhead costs should be incurred at an activity level of 21,000 labor-hours (the denominator activity level) Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost $ 73,500 115,500 $ 189,000 During the most recent year, the following operating results were recorded Activity: Actual labor-hours worked Standard labor-hours allowed for the actual output 18,000 19,000 Cost: Actual variable manufacturing overhead cost incurred Actual fixed manufacturing overhead cost incurred $ 84,600 $ 99,750 At the end of the year, the company's Manufacturing Overhead account contained the following data Manufacturing Overhead 184,350 Applied Actual 171,000 13,350 Management would like to determine the cause of the $13,350 underapplied overhead Required: 1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements 2. Show how the $171,000 Applied figure in the Manufacturing Overhead account was computed 3. Breakdown the $13,350 underapplied overhead into four components: (1) variable overhead rate variance, (2) variable overhead efficiency variance, (3) fixed overhead budget variance, and (4) fixed overhead volume variancee

Explanation / Answer

Predetermined overhead rate = Estimated Total manufacturing overhead cost / Estimated standard direct labor-hours

Predetermined overhead rate = $189000/21000= $9/DLH

Variable element = $73500/21000= $3.5/DLH

Fixed element = $115500/21000 = $5.5/DLH

2.

Manufacturing Overhead Applied = 19000 standard hours X $9 per hour = $171000

3.

Variable overhead:

Variable Overhead rate variance = (Actual Rate*Actual Hour -Standard Rate*Actual Hour )

Variable Overhead rate variance = ($84600 – $3.5*18000)= $21600 Unfavourable

Variable Overhead efficiency variance =(Actual Hour-Standard Hour )Standard Rate

Variable Overhead efficiency variance = (18000-19000)*3.50= 3500 Favourable

Fixed overhead:

Budget variance = Actual Fixed Overhead - Budgeted Fixed Overhead

Budget variance = $99750-$115500=$15750 Favourable

Volume variance = ( Budgeted Fixed Overhead - Standard Hour Allowed * Standard Rate)

Volume variance = ($115500 - 19000*5.5) = $11000 Unfavourable

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