PROBLEM 11A-12 Selection of a Denominator: Overhead Analysis; Standard Cost Card

Question

PROBLEM 11A-12 Selection of a Denominator: Overhead Analysis; Standard Cost Card IL011-3 L011-4] Mort on Company's variable manufacturing overhead should be $4.50 per standard direct labor- The company manufactures a single product that requires two d hour and fixed manufacturing should be $270.000 per year. irect labor-hours to complete. T he direct labor wage rate is $15 per hour. Four feet of raw material are required for each unit of product; the standard cost of the material is $8.75 per foot Although normal activity is 30,000 direct labor-hours each year, the company expects to oper ate at a 40,000-hour level of activity this year Required 1. Assume that the company chooses 30,000 direct labor-hours as the denominator level of activity Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activ- ity. Repeat the computations in requirement Complete two standard cost cards as outlined below. 2. 3. Denominator Activity: 30,000 Direct Labor-Hours Direct materials, 4 feet at $8.75 per foot. Direct labor, ? Variable manufacturing overhead, ?. Fixed manufacturing overhead,? Standard cost per unit.. $35.00 Denominator Activity: 40,000 Direct Labor-Hours Direct materials, $4 feet at $8.75 per foot. Direct labor, ? Variable manufacturing overhead, ? Fixed manufacturing overhead.? Standard cost per unit. S ? 4. Assume that the company actually produces 18,000 units and works 38.000 direct labor- hours during the year. Actual manufacturing overhead costs for the year are: Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost. $174,800 271,600 $446,400

Explanation / Answer

1 Direct Labour hours 30000 Variable manufacturing overhead rate Overhead rate for manufacturing overhead = Estimated manufacturing Overhead cost / Estimated number of machine hours Estimated manufacturing overheads (variable) = 4.5*30000 = $135000 Overhead rate = $135000/30000 = $4.5 per hour Fixed manufacturing overhead rate: Overhead rate for manufacturing overhead = Estimated manufacturing Overhead cost / Estimated number of machine hours Manufaturing cost = $270000 Overhead rate = $270000/30000 = $9 per hour 2 Direct Labour hours 40000 Variable manufacturing overhead rate Overhead rate for manufacturing overhead = Estimated manufacturing Overhead cost / Estimated number of machine hours Estimated manufacturing overheads (variable) = 4.5*40000 = $180000 Overhead rate = $180000/40000 = $4.5 per hour Fixed manufacturing overhead rate: Overhead rate for manufacturing overhead = Estimated manufacturing Overhead cost / Estimated number of machine hours Manufaturing cost = $270000 Overhead rate = $270000/40000 = $6.75 per hour 3 Denominator activity: 30000 Direct labour hours Direct materials: 4 feet at 8.75 per foot $ 35 Direct labor ($15 *2) $ 30 Variable manufacturing overhead ($4.5 *2) $ 9 Fixed manufacturing overhead ($9 * 2) $ 18 Standard Cost per unit $ 92 Denominator activity: 40000 Direct labour hours Direct materials: 4 feet at 8.75 per foot $ 35 Direct labor ($15 *2) $ 30 Variable manufacturing overhead ($4.5 *2) $ 9 Fixed manufacturing overhead ($6.75 * 2) $ 13.5 Standard Cost per unit $ 87.5 4 Overhead rates: Variable Overhead rate= $174800/38000 = $4.6 per hour Fixed Overhead rate = $ 271600 / 38000 = $ 7.14 per hour

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