Problem 10A-8 Applying Overhead; Overhead Variances [LO10-3, LO10-4] Lane Compan

Question

Problem 10A-8 Applying Overhead; Overhead Variances [LO10-3, 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 $4.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,935,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $9.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.30 per hour.

The company planned to operate at a denominator activity level of 225,000 direct labor-hours and to produce 150,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

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 fixed overhead budget and volume variances.

Actual number of units produced 180,000 Actual direct labor-hours worked 292,500 Actual variable manufacturing overhead cost incurred $ 789,750 Actual fixed manufacturing overhead cost incurred $ 2,047,500

Explanation / Answer

1) Predetermined overhead rate Variable manufacturing overhead 4.6 Fixed manufacturing overhead (1,935,000/225,000)= 8.6 predetermined overhead rate 13.2 $13.2 per direct labor hours 2) Standard cost card $ Direct materials (4 pounds *$9.5 per pound) 38 Direct labor (1.5 hours *$13.3 per hour) 19.95 Variable overhead rate (1.5 hours * $4.6 per hour) 6.9 fixed overhead rate (1.5 hours *$8.6 per hour) 12.9 Standard cost per unit 77.75 3)-a) Standard direct labor hours allowed for Actual production * standard direct labor hr per unti 180,000*1.5 270000 hrs answer 3-b)       Manufacturing overhead Actual variable overhead 789,750 Applied VOH (270,000*4.6) 1242000 Actual fixed overhead 2,047,500 Applied FOH (270,000*8.6) 2322000 overhead overapplied 726,750 Variable overhead rate variance (Actual rate - standard rate )*Actual hours (789,750 - 4.6*292500) 555,750 F Variable overhead Efficiency variance (Actual hours - standard hours )*Standard rate (292500-270000)*4.6 103500 U fixed overhead budget variance Actual fixed overhead - budgeted fixed overhead (2,047,500-1,935,000) 112500 U Fixed overhead volumevariance (Budgeted fixed overhead -standard hrs allowed *std rate) 1,935000-270000*8.6) 387,000 F

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