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 flexible budget, the following manufacturing overhead costs should be incurred at an activity level of 20,000 labor-hours (the denominator activity level):

During the most recent year, the following operating results were recorded:

Management would like to determine the cause of the $11,800 underapplied overhead.

Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements. (Round your answers to 2 decimal places.)

Show how the $153,000 Applied figure in the Manufacturing Overhead account was computed.(Round your per hour value to 2 decimal places.)

Analyze the $11,800 underapplied overhead figure in terms of 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).)

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 flexible budget, the following manufacturing overhead costs should be incurred at an activity level of 20,000 labor-hours (the denominator activity level):

Explanation / Answer

1. Predetermined overhead rate = Budgeted manufacturing overhead cost / Budgeted labor hours = $ 170,000 / 20,000 = $ 8.50 per labor hour.

Variable component = $ 65,000 / 20,000 = $ 3.25

Fixed component = $ 105,000 / 20,000 = $ 5.25

2. Applied manufacturing overhead = Predetermined rate x Standard labor hours allowed for output = $ 8.50 x 18,000 = $ 153,000

3. Total actual overhead costs incurred = $ ( 74,800 + 90,000) = $ 164,800

Total overheads applied = $ 153,000

Underapplied overheads = $ 164,800 - $ 153,000 = $ 11,800

Variable overhead rate variance = ( Standard rate per hour - Actual rate ) x Actual hours worked = ( $ 3.25 - $ 4.4) x 17,000 = $ 19,550 U

Variable overhead efficiency variance = ( Standard hours for actual output - Actual hours worked) x Standard rate per hour = ( 18,000 - 17,000) x $ 3.25 = $ 3,250 F

Fixed overhead volume variance = ( Standard cost - Actual cost ) = 18,000 x $ 5.25 - $ 90,000 = $ 4,500 F

Total variance = $ 19,550 U + $ 3,250 F + $ 4,500 F = $ 11,800 U

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