Palladium Inc. produces a variety of household cleaning products. Palladium’s controller has developed standard costs for the following four overhead items: Overhead Item Total Fixed Cost Variable Rate per Direct Labor Hour Maintenance $ 86,000 $0.20 Power 0.45 Indirect labor 140,000 2.10 Rent 35,000 Next year, Palladium expects production to require 90,000 direct labor hours. Required: 1. Prepare an overhead budget for the expected level of direct labor hours for the coming year. Palladium Inc. Overhead Budget For the Coming Year Variable costs: Rate per Hour Activity Level 90,000 Hours Maintenance $ $ Power Indirect labor Total variable cost $ Fixed costs: Maintenance $ Indirect labor Rent Total fixed costs $ Total overhead costs $ 2. Prepare an overhead budget that reflects production that is 15% higher than expected and for production that is 15% lower than expected. Activity Level Rate per Hour Hours Hours Variable costs: Maintenance $ $ $ Power Indirect labor Total variable costs $ $ Fixed costs: Maintenance $ $ Indirect labor Rent Total fixed costs $ $ Total overhead costs $ $ Feedback
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Palladium Inc. produces a variety of household cleaning products. Palladium’s controller has developed
| Overhead Item | Total Fixed Cost | Variable Rate per Direct Labor Hour |
| Maintenance | $ 86,000 | $0.20 |
| Power | 0.45 | |
| Indirect labor | 140,000 | 2.10 |
| Rent | 35,000 |
Next year, Palladium expects production to require 90,000 direct labor hours.
Required:1. Prepare an overhead budget for the expected level of direct labor hours for the coming year.
| Palladium Inc. | |||
| Overhead Budget | |||
| For the Coming Year | |||
| Variable costs: | Rate per Hour | Activity Level 90,000 Hours |
|
| Maintenance | $ | $ | |
| Power | |||
| Indirect labor | |||
| Total variable cost | $ | ||
| Fixed costs: | |||
| Maintenance | $ | ||
| Indirect labor | |||
| Rent | |||
| Total fixed costs | $ | ||
| Total overhead costs | $ |
2. Prepare an overhead budget that reflects production that is 15% higher than expected and for production that is 15% lower than expected.
| Activity Level | |||
| Rate per Hour | Hours |
Hours |
|
| Variable costs: | |||
| Maintenance | $ | $ | $ |
| Power | |||
| Indirect labor | |||
| Total variable costs | $ | $ | |
| Fixed costs: | |||
| Maintenance | $ | $ | |
| Indirect labor | |||
| Rent | |||
| Total fixed costs | $ | $ | |
| Total overhead costs | $ | $ |
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