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 2 640,000 16,000 Direct labor hours 128,000 192,000 Machine hours Overhead cost $384,000 S1,152,000 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 $400,000 204,800 S1,232,000 Overhead cost Product 1 Product 2 Direct labor hours: Department 1 Department 2 480,000 96,000 147,200 38,400 Machine hours: Department 1 Department 2 8,000 9,600 24,800 180,000 (сontimued)
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.
Required:
1. Compute the plantwide predetermined
each product.
2. Calculate the predetermined departmental overhead rates and calculate the overhead
assigned to each product.
3. Using departmental rates, compute the applied overhead for the year. What is the under- or
overapplied overhead for the firm?
4. Prepare the
3, assuming it is not material in amount. What additional information would you need if
the variance is material to make the appropriate journal entry?
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