Predetermined Overhead Rates, Overhead Variances, Unit Costs Primera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor
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.
Predetermined
Primera Company produces two products and uses a predetermined overhead rate to apply overhead. Primera currently applies overhead using a plantwide rate based on direct labor hours. Consideration is being given to the use of departmental overhead rates where overhead would be applied on the basis of direct labor hours in Department 1 and on the basis of machine hours in Department 2. At the beginning of the year, the following estimates are provided:
| Department 1 | Department 2 | ||
| Direct labor hours | 640,000 | 128,000 | |
| Machine hours | 16,000 | 192,000 | |
| Overhead cost | $384,000 | $1,152,000 |
Actual results reported by department and product during the year are as follows:
| Department 1 | Department 2 | ||
| Direct labor hours | 627,200 | 134,400 | |
| Machine hours | 17,600 | 204,800 | |
| Overhead cost | $400,000 | $1,232,000 |
| Product 1 | Product 2 | ||
| Direct labor hours | |||
| Department 1 | 480,000 | 147,200 | |
| Department 2 | 96,000 | 38,400 | |
| Machine hours | |||
| Department 1 | 8,000 | 9,600 | |
| Department 2 | 24,800 | 180,000 |
Required:
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