Question

Problem 10A-9 Applying Overhead; Overhead Variances [LO10-3, LO10-4]

Chilczuk, S.A., of Gdansk, Poland, is a major producer of classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the company’s flexible budget, the following manufacturing overhead costs should be incurred at an activity level of 14,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost	$	24,500
Fixed manufacturing overhead cost		52,500
Total manufacturing overhead cost	$	77,000

During the most recent year, the following operating results were recorded:

Activity:
Actual labor-hours worked		11,000
Standard labor-hours allowed for output		11,500
Cost:
Actual variable manufacturing overhead cost incurred	$	28,600
Actual fixed manufacturing overhead cost incurred	$	42,000

At the end of the year, the company’s Manufacturing Overhead account contained the following
data:

Manufacturing Overhead

Actual	70,600		Applied	63,250
	7,350

Management would like to determine the cause of the $7,350 underapplied overhead.

Required:
1.	Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements. (Round your answers to 2 decimal places.)

      

2.	Show how the $63,250 Applied figure in the Manufacturing Overhead account was computed. (Round your per hour value to 2 decimal places.)

     

3.	Analyze the $7,350 underapplied overhead figure in terms of 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).)

     

Answer 1

Part 1

predetermined overhead rate = Total manufacturing overhead / total estimated labor hours = 77000/14000 = $5.50 per DLH

variable element = 24500/14000 = $1.75 per DLH

fixed element = 52500/14000 = 3.75 per DLH

Part 2

11500 standard DLHs * $5.50 per DLH = $63,250

Part 3

Variable overhead spending variance = AH*(AR-SR) = (AH*AR)-(AH-SR) = 28600-(11000*1.75) = 9350 U

variable overhead efficiency variance = SR*(AH-SH) = 1.75*(11000-11500) = -875 = 875 F

Fixed overhead budget variannce = Actual fixed overhead cost - budgeted fixed overhead cost = 42000-52500 = -10500 = 10500 F

fixed overhead volume variance = budgeted fixed overhead cost - fixed overhead cost applied to work in process (SH*SR) = 52500-(11500*3.75) = 9375 U

verification of ovehead underapplied = 9350 U +875 F + 10500 F + 9375 U = 7350 U (which means it's underapplied)