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PROBLEM 11A-8 Applying Overhead; Overhead Variances (L011-3, LO11-4 Lane Company manufactures a single product that requires a great deal of hand labor. Overhead co is applied on the basis of standard direct labor-hours. Variable manufacturing overhead should he $2 per standard direct labor-hour and fixed manufacturing overhead should be $480,000 per year The company’s product requires 3 pounds of material that has a standard cost of $7 per and 1.5 hours of direct labor time that has a standard rate of $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: Actual direct labor-hours worked Actual variable manufacturing overhead cost incurred Actual fixed manufacturing overhead cost incurred. 42,000 65,000 $123,500 $483,000
Expert Answer
1. Predetermined overhead rate : $ 10 per direct labor hour.
Variable overhead rate : $ 2 per direct labor hour
Fixed overhead rate : $ 480,000 / 60,000 direct labor hours = $ 8
2. Standard cost card :
| Quantity per unit | Rate | Cost per unit | |
| Direct Materials | 3 lb. | $ 7 per lb. | $ 21 |
| Direct Labor | 1.5 hours | $ 12 per hour | 18 |
| Variable Overhead | 1.5 hours | $ 2 per hour | 3 |
| Fixed Overhead | 1.5 hours | $ 8 per hour | 12 |
| $ 54 |
3. a. Standard labor hours allowed for the year’s production = 42,000 x 1.5 = 63,000 direct labor hours.
b. Manufacturing Overhead Account:
| 123,500 | 130,000 |
| 483,000 | 520,000 |
4. Overapplied overhead = $ 43,500
Variable overhead rate variance = $ ( 2.00 – 1.90) x 65,000 hours = $ 6,500 F
Variable overhead efficiency variance = ( 63,000 – 65,000) x $ 2.00 = $ 4,000 U
Fixed overhead budget variance = $ 480,000 – $ 483,000 = $ 3,000 U
Fixed overhead volume variance = ( 40,000 – 42,000) x $ 12 per unit = $ 24,000 F
