Question

Bluecap Co. uses a standard cost system and flexible budgets for control purposes. The following budgeted information pertains to 2016:

Denominator volume—number of units	8,000
Denominator volume—percent of capacity	80%
Denominator volume—standard direct labor hours	24,000
Budgeted variable factory overhead cost at denominator volume	$103,200
Total standard factory overhead rate per direct labor hour	$15.10

During 2016, Bluecap worked 28,000 direct labor hours and manufactured 9,600 units. The actual factory overhead cost for the year was $14,000 greater than the flexible budget amount for the units produced, of which $6,000 was due to fixed factory overhead. In preparing a budget for 2017 Bluecap decided to raise the level of operation to 90% of capacity (a level it considers to be "practical capacity"), to manufacture 9,000 units at a budgeted total of 27,000 direct labor hours.

Under the assumption that the total budgeted fixed overhead for 2014 is the same as it was for 2013, what is the standard fixed overhead application rate per direct labor hour for Bluecap Co. for 2014?

		$4.30.
		$4.50.
		$6.90.
		$9.30.
		$9.60.

Answer 1

Solution: $9.60

Working:

Total standard factory overhead rate per direct labor hour = $15.10

Standard variable overhead rate per direct labor hour = $103,200/24,000 hours = $4.30

Standard fixed overhead application rate per direct labor hour = $15.10 - $4.30 = $10.80

Budgeted fixed overhead cost = standard fixed overhead rate per direct labor hour * denominator volume in direct labor hours = $10.80 * 24,000 = $259,200.

Budgeted fixed overhead year- 2014 = budgeted fixed overhead, 2010 = $259,200.

Budgeted fixed overhead rate year-2014 = $259,200/denominator volume in direct labor hours = $259,200/27,000 = $9.60