Cashman Corporation estimated overhead for the year as follows: fixed = $600,000
ID: 2567300 • Letter: C
Question
Cashman Corporation estimated overhead for the year as follows: fixed = $600,000; variable = $5 per unit. Cashman expected to produce 60,000 units for the year. a. Compute the rate that will be used to apply overhead costs to products. b. During the year, Cashman incurred actual overhead costs of $920,000 and produced 62,000 units. Compute the overhead applied to units produced. c-1. Compute the amount of under- or overapplied overhead. c-2. Compute the amount of the spending and volume variances. d. What caused applied overhead to be different from budgeted overhead?
Explanation / Answer
Solution:
a) Computation of the rate that will be used to apply overhead costs to products.
Overhead Allocation Rate = Total Estimated Overhead / Total Estimated Production Units
Total Estimated Overhead = Fixed Overhead $600,000 + Total Variable Overhead 60,000 Units x $5
= $600,000 + 300,000
= $900,000
Overhead Allocation Rate = Total Estimated Overhead 900,000 / Total Estimated Production Units 60,000
= $15 per unit
Overhead Allocation Rate is $15 per unit
b) the overhead applied to units produced
Overhead applied to units produced = Units Produced x Overhead Allocation Rate per unit
= 62,000 Units x $15
= $930,000
c-1) Under or Over Applied Overhead
Actual Overhead Incurred = $920,000
Overhead Applied to the units produced = $930,000
Since the applied overheads are higher than actual overheads, the overheads are over applied.
Over Applied Overhead = 930,000 – 920,000 = $10,000
c-2)
Spending Amount = Budgeted Overheads – Actual Overhead
= 900,000 – 920,000
= $20,000 Unfavorable
Volume Variance = Applied Overheads – Budgeted Overheads
= 930,000 – 900,000
= $30,000 Favorable
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