NOTE: I need help with the final 2 questions at the bottom. I believe the answer
ID: 2531411 • Letter: N
Question
NOTE: I need help with the final 2 questions at the bottom. I believe the answer has something to do with the differences in the Volume Variances between 30,000 DLH nd 40,000 DLH.
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C. Determine the cause of the underapplied or overapplied overhead for the year by commuting the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.
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Using 30,000 DLH.
Variable Overhead
18,000 actual units x 2 DLH
AQ x AP
AQ x SP
SQ x SP
38,000 x $4.60
38,000 x $4.50
36,000 x $4.50
174,800
171,000
162,000
3,800 U
9,000 U
Spending Variance
Efficiency Variance
-
-
Fixed Overhead
SQ x F.MOH
Actual
Budget “Standard”
Applied
36,000 x $9.00
271,600
270,000
324,000
1,600 U
54,000 F
Spending Variance
Volume Variance
-
-
V. MOH
Spending variance
3,800 U
Efficiency variance
9,000 U
F. MOH
Spending variance
1,600 U
Volume variance
54,000 F
Over Applied M. MOH
39,600 F
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Using 40,000 DLH.
Variable Overhead
18,000 actual units x 2 DLH
AQ x AP
AQ x SP
SQ x SP
38,000 x $4.60
38,000 x $4.50
36,000 x $4.50
174,800
171,000
162,000
3,800 U
9,000 U
Spending Variance
Efficiency Variance
-
-
Fixed Overhead
SQ x F.MOH
Actual
Budget “Standard”
Applied
36,000 x $6.75
271,600
270,000
243,000
1,600 U
27,000 U
Spending Variance
Volume Variance
-
-
V. MOH
Spending variance
3,800 U
Efficiency variance
9,000 U
F. MOH
Spending variance
1,600 U
Volume variance
27,000 F
Over Applied M. MOH
41,400 F
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1) Looking at the variances you have computed, what appears to be the major disadvantage of using normal activity rather than expected activity as a denominator in computing the predetermined overhead rate?
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2) What advantages can you see to offset this disadvantage?
Variable Overhead
18,000 actual units x 2 DLH
AQ x AP
AQ x SP
SQ x SP
38,000 x $4.60
38,000 x $4.50
36,000 x $4.50
174,800
171,000
162,000
3,800 U
9,000 U
Spending Variance
Efficiency Variance
Explanation / Answer
Since you have not posted the entire question, I am assuming that 30,000 DLH and 40,000 DLH must be the 2 different budgeted level of activities.
In that case, the Fixed overhead applied rates would be different in both the cases, which are $9 and $4.5 respectively for 30000 and 40000 DLH. ( Applied rate = Budgeted FOH ÷ Budgeted Level of activity )
As you can see that the level of activity (here , in DLHs) is the denominator, therefore, when the budgeted level of activity increases, FOH remaining constant, the Applied rate would fall.
Thus, Applied FOH amount would also fall.
This explains why it is important to correctly determine the Level of activity for setting of standards!
Hence, the answers to your questions would be as follows:
1. The major disadvantage of using normal activity rather than expected activity is -
~ There would be huge differences in actual amount incurred at the end of the period and the amount absorbed.
~ If the normal level is generally lower than the actual expected level, then it would always result in Overabsorption as the applied rates would be higer ( due to a low denominator) and vice versa.
2. The advantages of using this procedure are -
If a company follows absorption costing for pricing their products, then ,in case of overabsorption, more amount would be recovered from the customers than actually incurred. However, the same becomes a loss for the Co. if the applied amount is lower than actual amount incurred.
I hope this helps.!
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