Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost...

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. The budgeted variable manufacturing overhead is $4.40 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,764,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $9.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.20 per hour.

The company planned to operate at a denominator activity level of 210,000 direct labor-hours and to produce 140,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced 168,000
Actual direct labor-hours worked 273,000
Actual variable manufacturing overhead cost incurred $ 709,800
Actual fixed manufacturing overhead cost incurred $ 1,911,000

Required:

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

2. Prepare a standard cost card for the company’s product.

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.

Business   Accounting   
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Answer #1
1 Predetermined overhead rate
Fixed overhead rate 8.40 (1764000/210000)
Variable overhead rate 4.4
Predetermined overhead rate 12.80
2 Per unit
Direct material 36 (4*9)
Direct labor 19.8 13.20*1.5
Predetermined overhead rate 12.80
Standard cost per unit 68.6
3a Standard direct labor hours allowed 252000 (168000*1.5)
3b Manufacturing overheads
Actual overheads 2620800 2872800 Overhead applied
252000 Overapplied
4 Variable overheads 1108800 (4.4*252000)
Fixed manufacturing overheads 1764000
Applied overheads 2872800
Actual overheads 2620800 (709800+1911000)
Over applied 252000
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