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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 $5.80 per standard direct labor-hour and fixed manufacturing overhead should be $3,087,000 per year.
The company’s product requires 4 pounds of material that has a standard cost of $12.50 per pound and 1.5 hours of direct labor time that has a standard rate of $13.90 per hour.The company planned to operate at a denominator activity level of 315,000 direct labor-hours and to produce 210,000 units of product during the most recent year. Actual activity and costs for the year were as follows:
Number of units produced 252,000
Actual direct labor-hours worked 409,500
Actual variable manufacturing overhead cost incurred $ 1,351,350
Actual fixed manufacturing overhead cost incurred $ 3,276,000
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.)
Predetermined Overhead Rate = $15.60 per DLH
Variable Rate = $5.80 per DLH
FIxed Rate = $9.80 per DLH
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).)

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Answer:

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

  • total standard overhead rate = $15.60
  • standard variable overhead rate = $5.80
  • standard fixed overhead rate = $9.80

3a. Compute the standard direct labor-hours allowed for the year’s production.

1.5 direct labor hours x 252,000 units = 378,000 hours

3b. Complete the following Manufacturing Overhead T-account for the year:

                                    Manufacturing overhead

Debit                                                       Credit

Actual variable cost $1,351,350            Applied variable cost $2,192,400

Actual fixed costs $3,276,000              Applied fixed costs $3,704,400

                                                                $1,269,450

Adjustment for over applied

overhead expense $1,269,450                                                                  

0                                                              0

4. Determine the reason for the underapplied or overapplied overhead from (3)

two different factors affected the overhead costs:

  1. Actual labor hours were higher than budgeted, since 378,000 should have been used to produce the 252,000 units, but 409,500 were used instead. That results in an unfavorable variance of 31,500 labor hours (8.3% variance).
  2. Even though labor hour variance was unfavorable, the actual overhead costs incurred were much lower than expected. The favorable variance regarding overhead costs was much larger than the unfavorable variance in labor hours. The actual total overhead per labor hour = $11.30 vs. $15.60 (standard), which represents a 27.6% favorable variance.

Explanation:

variable overhead $5.80 per direct labor hour

fixed overhead $3,087,000

each unit requires:

4 pounds of materials at standard cost of $12.50 per pound

1.5 direct labor hours at standard rate of $13.90 per hour

fixed overhead per direct labor hour = $9.80

total budgeted production 210,000 units

total budgeted direct labor hours 315,000

actual units produced 252,000

actual direct labor hours 409,500

actual variable manufacturing $1,351,350

actual fixed manufacturing $3,276,000

applied variable cost = $5.80 x 378,000 labor hours = $2,192,400

applied fixed costs = $9.80 x 378,000 labor hours = $3,704,400

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