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| 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. Variable manufacturing overhead should be $2.60 per standard direct labor-hour and fixed manufacturing overhead should be $495,000 per year. |
| The company’s product requires 4 pounds of material that has a standard cost of $4.50 per pound and 1.5 hours of direct labor time that has a standard rate of $12.30 per hour. |
| The company planned to operate at a denominator activity level of 75,000 direct labor-hours and to produce 50,000 units of product during the most recent year. Actual activity and costs for the year were as follows: |
| Number of units produced | 60,000 |
| Actual direct labor-hours worked | 97,500 |
| Actual variable manufacturing overhead cost incurred | $ 165,750 |
| Actual fixed manufacturing overhead cost incurred | $ 536,250 |
| Required: | |
| 1. | Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements. (Round your answers to 2 decimal places.) |
| 2. | Prepare a standard cost card for the company’s product. (Round your answers to 2 decimal places.) |
| 3a. | Compute the standard direct labor-hours allowed for the year’s production. |
| 3b. | Complete the following Manufacturing Overhead T-account for the year: |
| 4. | Determine the reason for the underapplied or overapplied overhead from (3) above by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance).) |
Expert Answer
Solution
1.
Variable manufacturing overhead rate=$2.60 per DLH
Fixed manufacturing overhead rate:$495,000/75,000=$6.60 per DLH
Predetermined overhead rate=$2.60+$6.60
=$9.20 per DLH
2. Standard cost card:
| Standard cost per unit | ||
| Direct material | 4 pounds×$4.50 per pound | $18 |
| Direct labour | 1.5 DLH×$12.30 per hour | $18.45 |
| Variable manufacturing overhead | 1.5 DLH × $ 2.60 per hour | $3.90 |
| Fixed manufacturing overhead | 1.5 DLH × $6.60 per hour | $9.90 |
| Total STD cost per unit | $50.25 per unit | |
3.a.
Standard DLH allowed=60,000 units×$1.5 DLH
=90,000
3.b
Manufacturing overhead account:
| Actual overhead cost incurred: | Applied overhead: | ||
| Variable manufacturing overhead:165,750 | (90,000 hours×$9.20 per hour,p | $828,000 | |
| Fixed manufacturing overhead:$536,250 | $702,000 | ||
| Balance (over applied overhead) | $126,000 | ||
