Schrader, Inc uses a budgeted factory-overhead rate to apply overhead to product

Question

Schrader, Inc uses a budgeted factory-overhead rate to apply overhead to production. The following data are available for the year ended December 31, 2010.

Budgeted factory overhead $675,000
Actual factory overhead $716,000
Budgeted direct-labor costs $450,000
Actual direct-labor costs $432,000
Budgeted direct-labor hours 12,500
Actual direct-labor hours 13,325
Required:
a. Determine the budgeted factory overhead rate based on direct-labor costs (show as a percentage).
b. Determine the budgeted factory overhead rate based on direct-labor hours (show as $/hr).
c. What is the applied overhead based on direct-labor costs?
d. What is the applied overhead based on direct-labor hours?
e. Assuming the variance is immaterial, give the journal entry to write off the variance based on direct-labor hours.

Explanation / Answer

a. Determine the budgeted factory overhead rate based on direct-labor costs (show as a percentage).
         $675,000 / $450,000 = 150% of direct labor cost

b. Determine the budgeted factory overhead rate based on direct-labor hours (show as $/hr).
        $675,000 / 12,500 = $54 per direct labor hour

c. What is the applied overhead based on direct-labor costs?
       $432,000 x 150%  = $648,000

d. What is the applied overhead based on direct-labor hours?
      13,325 hours x $54  = $719,550

e. Assuming the variance is immaterial, give the journal entry to write off the variance based on direct-labor hours.

 Variance = Actual factory overhead - Applied overhead
              = $716,000 - $719,550 = $3,550 Favorable (Overapplied)
____________________________________________
 Manufacturing Overheads            $3,550
     Cost of goods sold                               $3,550
____________________________________________

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