Morton Company’s budgeted variable manufacturing overhead is $1.50 per direct la
ID: 2518759 • Letter: M
Question
Morton Company’s budgeted variable manufacturing overhead is $1.50 per direct labor-hour and its budgeted fixed manufacturing overhead is $336,000 per year.
The company manufactures a single product whose standard direct labor-hours per unit is 1.5 hours. The standard direct labor wage rate is $20 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $8 per foot.
Although normal activity is 40,000 direct labor-hours each year, the company expects to operate at a 30,000-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.
2. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements.
3. Complete two standard cost cards as outlined below.
4. Assume that the company actually produces 22,000 units and works 39,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are:
a. Compute the standard direct labor-hours allowed for this year’s production.
b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 30,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above.
c. Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.
Variable manufacturing overhead cost $ 65,400 Fixed manufacturing overhead cost 345,200 Total manufacturing overhead cost $ 410,600Explanation / Answer
1. Budgeted Direct Labour Hours = 30,000 Hours
Budgeted Production (Units) = Budgeted Direct Labour Hours / Standard Direct Labour Hours per Units
= 30,000 hours / 1.5 hours per unit = 20,000 units
Fixed Manufacturing Overhead Absorption Rate = Budgeted Fixed Manufacturing Overhead / Budgeted Production
= $336,000 / 20,000 units = $16.8 per unit
Variable Manufacturing Overhead Rate = Variable Manufacturing Overhead Rate per Direct Labour Hour / Direct Labour Hours per Unit
= $1.50 / 1.5 Direct Labour Hours per Unit = $1 per unit
2. Budgeted Direct Labour Hours = 40,000 Hours
Budgeted Production (Units) = Budgeted Direct Labour Hours / Standard Direct Labour Hours per Units
= 40,000 hours / 1.5 hours per unit = 26,667 units
Fixed Manufacturing Overhead Absorption Rate = Budgeted Fixed Manufacturing Overhead / Budgeted Production
= $336,000 / 26,667 units = $12.6 per unit
Variable Manufacturing Overhead Rate = Variable Manufacturing Overhead Rate per Direct Labour Hour / Direct Labour Hours per Unit
= $1.50 / 1.5 Direct Labour Hours per Unit = $1 per unit
3. Cannot be answered as the standard costs cards are not available
4. a. Standard Direct Labour Hours for Actual Production = Actual Production / Standard Direct Labour Hours per Unit
= 22,000 Units / 1.5 Direct Labour Hours per Unit = 14,667 Direct Labour Hours
b. Cannot be answered as the T-Account is not available
c. Variable Overhead Rate Variance = Actual Production x (Standard Variable Overhead Rate - Actual Variable Overhead Rate) = 22,000 x (1 - 65,400 / 22,000) = $43,400 (Adverse)
Variable Overhead Efficiency Variance = Standard Variable Overhead Rate x (Standard Labour Hours for Actual Production - Actual Labour Hours) = 1 x (22,000 x 1.5 - 39,000) = $6,000 (Adverse)
Fixed Overhead Budget Variance = Actual Fixed Overhead - Budgeted Fixed Overhead = 345,200 - 336,000
= $9,200 (Adverse)
Fixed Overhead Volume Variance = Absorbed Fixed Overhead - Budgeted Fixed Overhead
= 22,000 x 336,000 / 20,000 - 336,000 = $33,600 (Favourable)
Note: Absorbed Fixed Overhead = Actual Production x Budgeted Fixed Overhead Absorption Rate
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