Chapter 9.A, Problem 9P

Applying Overhead; Overhead Variances

Chilczuk. S.A., of Gdansk. Poland, is a major producer of classic Polish sausage, The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours, According to the company^’s planning budget, the following manufacturing overhead costs should be incurred at an activity level of 35.000 labor-hours (the denominator activity level):

During the most recent year, the following operating results were recorded:

At the end of the year, the company's Manufacturing Overhead account contained the following data:

Management would like to determine the cause of the $15,400 underapplied overhead.

Required:

1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.
2. Show how the $272,000 Applied figure in the Manufacturing Overhead account was computed.
3. Breakdown the $15,400 underapplied overhead into four components: (1) variable overhead rate variance. (2) variable overhead efficiency variance. (3) fixed overhead budget variance, and (4) fixed overhead volume variance.
4. Explain the meaning of each variance that you computed in (3) above.