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.