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com/flow/connect.html O Not secure https/ Help Save&Exit; Saved Check my Problem 10A-8 Applying Overhead; Overhead Variances [L010-3, LO10-4) Lane Company manufactures a single product and applies overhead cost to that product using standard direct labor-hours. The budgeted variable manufacturing overhead is $2.80 per direct labor-hour and the budgeted fixed manufacturing overhead is $612,000 per year. The standard quantity of materials is 4 pounds per unit and the standard cost is $5.00 per pound. The standard direct labor- hours per unit is 1.5 hours and the standard labor rate is $12.40 per hour. The company planned to operate at a denominator activity level of 90,000 direct labor-hours and to produce 60,000 units of product during the most recent year. Actual activity and costs for the year were as follows: 72,800 117,000 Actual number of units produced Actual direct labor-hours worked Actual variable manufacturing overhead cost incurred $210,688 Actual fixed manufacturing overhead cost incurred $643,566 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 K Prev6 of 6Next Type here to search 31/2015

Explanation / Answer

Solution:

Part 1 --- Calculation of Predetermined Overhead Rate

Predetermined Overhead Rate

- The manufacturing costs which cannot be directly traceable with the production department or product are called manufacturing overheads or indirect manufacturing costs.

- Manufacturing Overheads are the indirect costs incurred in production department during making the product. It includes all indirect costs related to the factory which are related to the production.

- Overheads are the indirect manufacturing costs incurred on the making of product. These costs are not directly traceable with the production volume because it incurred for a period or in lump sum amount.

- Generally, the overhead costs are applied to the production department on predetermined basis since these costs are not directly traceable with the production.

- Predetermined Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.

- Normally, it is calculated at the beginning of the period.

- It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).

- Allocation bases may be direct labor hours, direct labor costs, machine hours etc..

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base i.e. Direct Labor Hours

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost $612,000 / Estimated Direct Labor Hours 90,000 = $6.80 per direct labor hour

Part 2 – Standard Cost Card

Per Unit Quantity / hours required

Rate

Standard Cost per Unit

Direct materials

4

pounds at

$5

Per pound

$20.00

Direct labor

1.5

hours at

$12.40

per hour

$18.60

Manufacturing Overhead

1.5

hours at

6.80

per hour

$10.20

Standard Cost per unit

$48.80

Part 3a ---

Standard direct labor hours allowed for the year’s production = Actual Production in Units x Std Labor Hours allowed per unit

= 60,000 Units x 1.5 Hours

= 90,000 Hours

Part 3b ---

Manufacturing Overhead T-Account

Manufacturing Overhead

Actual Costs (210,600 + 643,500)

$854,100

$795,600

Applied Costs (Refer Note 1)

$58,500

Note 1 ---

Applied Manufacturing Overhead Costs = Actual Hours Worked 117,000 Hours x Predetermined Overhead Rate $6.80

= $795,600

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Per Unit Quantity / hours required

Rate

Standard Cost per Unit

Direct materials

4

pounds at

$5

Per pound

$20.00

Direct labor

1.5

hours at

$12.40

per hour

$18.60

Manufacturing Overhead

1.5

hours at

6.80

per hour

$10.20

Standard Cost per unit

$48.80

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