Chapter 10A, Problem 10A.8P

Applying Overhead; Overhead Variances LO10—3, LO10—4

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. The budgeted variable manufacturing overhead is $2 per direct labor-hour and the budgeted fixed manufacturing overhead is $480,000 per year.

The standard quantity of materials is 3 pounds per unit and the standard cost is $7 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12 per hour The company planned to operate at a denominator activity level of 60,000 direct labor-hours and to produce 40,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Required:

1. Compute the predetermined overhead rate for the year Break the rate down into variable and fixed elements.
2. Prepare a standard cost card for the company’s product; show the details for all manufacturing costs on your standard cost card.
3. Do the following:
1. Compute the standard direct labor-hours allowed for the year’s production.
2. Complete the following Manufacturing Overhead T-account for the year:



4. Determine the reason for any underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.
5. Suppose the company had chosen 65,000 direct labor-hours as the denominator activity rather than 60,000 hours. State which, if any, of the variances computed in (4) above would have changed, and explain how the variance(s) would have changed. No computations are necessary.

To determine

The predetermined overhead rate for the year. Break the rate down into variable and fixed elements.

Introduction: Overhead means the ongoing business expenses which are not directly incurred while producing product or service. Overhead is important while preparing budget but it is also used to determine the amount company must charge in order to incur profit.

Answer to Problem 10A.8P

Total direct labor cost is $10, variable overhead labor cost is $2, and Fixed overhead labor cost is $8.

Explanation of Solution

  $\begin{array}{l}Totaldirectlabor\cos t=\frac{\left[\begin{array}{l}Fixedmanufacturingoverhead\cos t+\\ (Variablemanufacturinglabor\cos tperhour\times \\ Totallaborhour\end{array}\right]}{Totallaborhour}\\ Totaldirectlabor\cos t=\frac{480,000+(2\times 60,000)}{60,000}\\ Totaldirectlabor\cos t=\$10\end{array}$

  $\begin{array}{l}Variableoverhaedlabor\cos t=\frac{(Variablemanufacturinglabor\cos tperhour\times Totallaborhour)}{Totallabourhour}\\ Variableoverhaedlabor\cos t=\frac{2\times 60,000}{60,000}\\ Variableoverhaedlabor\cos t=\frac{120,000}{60,000}\\ Variableoverhaedlabor\cos t=\$2\end{array}$

  $\begin{array}{l}Fixedlabor\cos t=\frac{Fixedmanufacturingoverhead\cos t}{Totallaborhour}\\ Fixedlabor\cos t=\frac{480,000}{60,000}\\ Fixedlabor\cos t=\$8\end{array}$

To determine

Prepare a standard cost card for the company’s product; show the details for all manufacturing cost on your standard cost card.

Introduction: Overhead means the ongoing business expenses which are not directly incurred while producing product or service. Overhead is important while preparing budget but it is also used to determine the amount company must charge in order to incur profit.

Answer to Problem 10A.8P

Standard labor cost per unit is $54

Explanation of Solution

  $\begin{array}{l}S\tan dardlabor\cos tperunit=\left[\begin{array}{l}(Materialrequiredperunit\times Material\cos tperunit)+\\ (\mathrm{Re}quiredlaborperhour\times Labor\cos tperhour)+\\ (\mathrm{Re}quired\mathrm{var}iableoverheadperunit\\ \times Variableoverhead\cos tperunit)+\\ (\mathrm{Re}quiredfixedoverheadperunit\\ \times Fixedoverhead\cos tperunit)\end{array}\right]\\ S\tan dardlabor\cos tperunit=(3\times 7)+(1.5\times 12)+(1.5\times 2)+(1.5\times 8)\\ S\tan dardlabor\cos tperunit=21+18+3+12\\ S\tan dardlabor\cos tperunit=\$54\end{array}$

To determine

Compute the standard direct-labor allowed for the year’s production and complete manufacturing overhead T-account of the year.

Introduction: Overhead means the ongoing business expenses which are not directly incurred while producing product or service. Overhead is important while preparing budget but it is also used to determine the amount company must charge in order to incur profit.

Answer to Problem 10A.8P

Standard direct labor hour is $63,000, under applied cost is $630,000, and over applied cost is $23,500

Explanation of Solution

  $\begin{array}{l}S\tan darddirectlaborhour=Totalproduction\times Laborhourperunit\\ S\tan darddirectlaborhour=42,000\times 1.5\\ S\tan darddirectlaborhour=63,000\end{array}$

Under applied cost is computed below: $\begin{array}{l}Underapplied\cos t=S\tan darddirectlabor\times pre\det er\min edrate\\ Underapplied\cos t=63,000\times 10\\ Underapplied\cos t=\$630,000\end{array}$

Over applied cost is computed below:

  $\begin{array}{l}Overapplied\cos t=Applied\cos t-actual\cos ts\\ Overapplied\cos t=630,000-606,500\\ Overapplied\cos t=\$23,500\end{array}$

To determine

The reason for any under applied and over applied overhead for the year.

Introduction: Overhead means the ongoing business expenses which are not directly incurred while producing product or service. Overhead is important while preparing budget but it is also used to determine the amount company must charge in order to incur profit.

Answer to Problem 10A.8P

Variable overhead rate variance is $6,500, Variable overhead efficiency variance is $4,000, Budget variance is $3,000, and volume variance is $24,000.

Explanation of Solution

  $\begin{array}{l}Variableoverheadrate\mathrm{var}iance=\left(\begin{array}{l}(Totallaborhour\times \\ \mathrm{var}iableoverhead\cos tperunit)\\ -Variableoverhead\cos t\end{array}\right)\\ Variableoverheadrate\mathrm{var}iance=((65,000\times 2)-123,500)\\ Variableoverheadrate\mathrm{var}iance=6,500\end{array}$

  $\begin{array}{l}Variableoverhaed\text{ efficiency }\mathrm{var}iance=\left(\begin{array}{l}Variableoverhead\cos tperunit\times (Totallaborhour-\\ (Totalproduction\times Laborhourperunit))\end{array}\right)\\ Variableoverhaed\text{ efficiency }\mathrm{var}iance=2\times (65,000-(42,000\times 1.5))\\ Variableoverhaed\text{ efficiency }\mathrm{var}iance=2\times (65,000-63,000)\\ Variableoverhaed\text{ efficiency }\mathrm{var}iance=\$4,000\end{array}$

  $\begin{array}{l}Budget\mathrm{var}iance=\left(Actualfixedoverhead\cos t-(Totaldirectlaborhour\times Labor\cos tperunit)\right)\\ \text{Budget }\mathrm{var}iance=483,000-(60,000\times 8))\\ \text{Budget }\mathrm{var}iance=483,000-480,000)\\ \text{Budget }\mathrm{var}iance=\$3,000\end{array}$

  $\begin{array}{l}Volume\mathrm{var}iance=\left(\begin{array}{l}Labor\cos tperhour\times \\ (Totalproduction\times Laborhourperunit)-\\ Totaldirectlabourhour)\end{array}\right)\\ Volume\mathrm{var}iance=8\times ((42,000\times 1.5)-60,000)\\ Volume\mathrm{var}iance=8\times (63,000-60,000)\\ Volume\mathrm{var}iance=24,000\end{array}$

To determine

Direct-labor hours changed from 60,000 to 65,000 hours. Give explanation for change in variances.

Introduction: Overhead means the ongoing business expenses which are not directly incurred while producing product or service. Overhead is important while preparing budget but it is also used to determine the amount company must charge in order to incur profit.

Answer to Problem 10A.8P

Change in direct labor hours changed few cost and variances like variable overhead labor cost, fixed overhead budget variance and fixed overhead volume variance.

Explanation of Solution

If direct-labor hours would have been changed from 60,000 to 65,000 as denominators activity then following cost will be changed such as variable overhead labor cost, fixed overhead budget variance and fixed overhead volume variance.