Cashman Corporation estimated overhead for the year as follows: fixed = $600,000

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?

Can you please walk through this problem based on the exact numbers given?

Explanation / Answer

ReqA.Budgeted Fixed overheads $ 600,000

Budgeted Output 60,000 units

Budgeted Fixed overhead rate = total budgeted overhead / budgeted output = 600,000 /60,000 = $ 10 per unit

Variable over head rate = $ 5 per unit

Total Overhead rate = variable rate + fixed rate = $ 5+ $ 10 = $ 15 per unit

ReqB.

Actual Output 62,000 units

Overhead rate per unit $ 15per unit

Overhead applied = units produced * overhead rate = 62,000 *15 = $ 930,000

ReqC-1: Overhead applied       $ 930,000

Less: Actual Overhead incurred $ 920,000

Overhead Overapplied              $ 10,000

Req C-2:

Spending Variance = Budgeted overheads - Actual Overhead incurred

                            = 60,000 units*15   -   $ 920,000 = $ 20,000 Unfavorable

Volume Variance = Absorbed Overheads - Budgeted Overheads

                         = Actual Output * Budgeted overhead rate per unit - Budgeted Output*Budgeted Overhead rate

= 62,000 units*15 - 60,000 units*15 = $ 30,000 favorable             

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