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 planning budget, the following manufacturing overhead costs should be incurred at an activity level of 16,000 labor-hours (the denominator activity level):

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

At the end of the year, the company’s Manufacturing Overhead account contained the following data:

Management would like to determine the cause of the $6,600 underapplied overhead.

Required:

1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.

2. Show how the $91,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the $6,600 underapplied overhead into four components: (1) variable overhead rate variance, (2) variable overhead efficiency variance, (3) fixed overhead budget variance, and (4) fixed overhead volume variance.

Variable manufacturing overhead cost $ 36,000 Fixed manufacturing overhead cost 68,000 Total manufacturing overhead cost $ 104,000

Explanation / Answer

Req 1: Pre determined overhead rate: Total Budgeted overheads / budgeted labour hours (104,000 /16,000) = $ 6.50 per labour hour Pre determined variable overhead rate: Total Budgeted variable overheads / budgeted labour hours (36,000 /16,000) = $ 2.25 per hour Pre determined Fixed overhead rate: Total Budgeted fixedoverheads / budgeted labour hours (68,000 /16,000) = $ 4.25 per labour hour Req 2: Std hours allowed for actual output     14,000 labour hours Std variable overheads allowed (14000 hours@2.25) 31500 Std Fixed overheads allowed(14,000 hours@4.25) 59500 Total overheads applied 91,000 Req 3: Variable overhead efficiency variance= Std rate per hor (Std hours allowed for actual ouput - Actual hours worked) 2.25 ( 14000-13000) = $ 2,250 Fvaorable Variable overhead rate variance = Actual hours worked(Std rate per hour - Actual rate per hour) 13000 ( 2.25- (41600/13000)) = $ 12,350 unfavorable Fixed overhead budget variance = Budgeted overhead - Actual fixed overheads 68000 -56000 = $ 12,000 favorable Fixed Overhead volume variance = Budgeted overheads for actual ouput- Budgeted overhead for budgeted output (Std fixed overhead rate per hour*Std hours alloowed for actual output)- Budgeted overheads (4.25*14,000) - 68,000= $ 8500 unfavorable Underapplied of $ 6600 is as follows: Variable rate variance 2250 Variable Efficiency variance -12350 Fixed Budgeted variance 12000 Fixed Volume variance -8500 Underapplied -6600

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