Silverstone’s production budget for March called for making 200,000 units of a

Question

Silverstone’s production budget for March called for making 200,000 units of a single product. The firm’s production standards allow one-quarter of a machine hour per unit produced. The fixed overhead budget for March was $108,000. Silverstone uses an absorption costing system. Annual activity and costs for March were:

Units produced…………………………………………………………………………..195,000

Fixed overhead costs incurred………………………………………………………...$111,000

Required:

a. Calculate the predetermined fixed overhead application rate that would be used in March.

b. Calculate the number of machine hours that would be allowed for actual March production.

c. Calculate the fixed overhead applied to work in process during March.

d. Calculate the over- or underapplied fixed overhead for March.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Predetermined fixed overhead application rate = Estimated Overhead/Estimated Activity = 108000/(200000*.25) = 2.16 per machine hour

Part B:

Number of machine hours that would be allowed for actual March production = 195000*.25 = 48750 hours

Part C:

Applied Overhead = 48750*2.16 = 105300

Part D:

= 111000 (Actual Overhead Incurred) - 105300 (Overhead Applied) = 5700 (Underapplied)

Part E:

Budget Variance = 108000 (Budgeted Overhead) - 111000 (Actual Overhead) = 3000 (U)

Volume Variance = (50000 (Budgeted Hours) - 48750 (Standard Hours for Actual Production))(2.16) = 2700 (U)

Thanks.

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