Question

Martinez Company produces one product, a putter called GO-Putter. Martinez uses a standard cost system and determines that it should take one hour of direct labor to produce one GO-Putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $900,000 comprised of $300,000 of variable costs and $600,000 of fixed costs. Martinez applies overhead on the basis of direct labor hours. During the current year, Martinez produced 72,700 putters, worked 82,300 direct labor hours, and incurred variable overhead costs of $130,860 and fixed overhead costs of $600,300. a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate. b) Compute the applied overhead for Martinez for the year. c)Compute the total overhead variance.

Answer 1

1.

	Predetermined overhead rate
Variable Overhead costs ($300000/100000)	$3.00
Fixed Overhead costs ($600000/100000)	$6.00
Total overhead costs	$9.00

2.

	Predetermined overhead rate	Standard DL Hours (72700*1)	Overhead costs applied
Variable Overhead costs	$3.00	72700	$2,18,100
Fixed Overhead costs	$6.00		$4,36,200
Total overhead costs applied	$9.00		$6,54,300

3.

total overhead variance = Applied overhead - Actual overhead

= $654300 - (130860+600300)

= $76,860 Unfavorable