Company’s variable manufacturing overhead should be $2.50per standard direct lab

Question

Company’s variable manufacturing overhead should be $2.50per standard direct labor-hour and fixed manufacturing should be $180,000 per year.

     The company manufactures a single product that requires 2.5 direct labor-hours to complete. The direct labor wage rate is $10 per hour. Three feet of raw material are required for each unit of product; the standard cost of the material is $7 per foot.

      Although normal activity is 50,000 direct labor-hours each year, the company expects to operate at a 60,000-hour level of activity this year.

Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.(Round your answers to 2 decimal places.)

Assume that the company chooses 60,000 direct labor-hours as the denominator level of activity. Repeat the computations in (1) above. (Round your answers to 2 decimal places.)

Complete two standard cost cards as outlined below. (Round your answers to 2 decimal places.)

Assume that the company actually produces 21,200 units and works 54,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:

Complete the Manufacturing Overhead account below. Assume that the company uses 50,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.

Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Company’s variable manufacturing overhead should be $2.50per standard direct labor-hour and fixed manufacturing should be $180,000 per year.

Explanation / Answer

Question 1. Direct Labour Hour 50000 No of units (@2.5Hours per unit) 20000 Fixed Manufacturing Overhead 180000 Fixed Overhead Rate per Direct Labour 3.6 Add: Variable Overhead Rate 2.5 Standard Manufacturing overhead per hour 6.1 Question 2. Normal direct labour hours 60000 Fixed Manufacturing Overhead per hour 3 ($180,000/60,000 Labour hour) Add: Variable overhead 2.5 Overhead rate per Direct labour hour. 5.5 Question 4.a Units Produced 21200 Standard Direct Labour hour for Actual Production 53000 (21200 x 2.5 hour per unit) Question 4.b Manufacturing Overhead Cost Debit Credit Expenses 317500 Work in process (53000 x 6.1) 323300 Overabsorbed Overhead 5800 323300 323300 Question 4.b Overhead is usually applied on the basis of predetermined rate. This rate may not be same with the actual overhead incurred during the period. In the present case Standard overhead rate is lower that the overhead applied.

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