PROBLEM 10-25 Applying Overhead; Overhead Variances [LO4, LO5, LO6] Ryder Compan

Question

PROBLEM 10-25 Applying Overhead; Overhead Variances [LO4, LO5, LO6]

Ryder Company produces a single product, school backpacks made of a sturdy nylon fabric. The production of these bags requires a relatively large amount of labour time. Overhead cost is applied on the basis of standard direct labour-hours. The company’s condensed flexible budget for manufacturing overhead is given below:

d

Each backpack requires 2 metres of direct material that has a standard cost of $1.50 per metre. The product requires 1.5 hours of direct labour time. The standard labour rate is $10 per hour.

During the year, the company had planned to operate at a denominator activity level of 15,000 direct labour-hours and to produce 10,000 units of product. Actual activity and costs for the year were as follows:

d

Required:

Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed components.

Compute the standard direct labour-hours allowed for the year’s production.

Complete the following manufacturing overhead T-account for the year:

d

Determine the reason for the underapplied or overapplied overhead from (2) above by computing the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.

Suppose the company had chosen 18,000 direct labour-hours as the denominator activity rather than 15,000 hours. State which, if any, of the variances computed in (3) above would have changed, and explain how the variance(s) would have changed. No computations are necessary.

Explanation / Answer

Ryder Company Requirement Predetermined overhead rate for the year Amount Predetermined overhead rate for the year per DLH Predetermined overhead rate for the year per unit Variable manufacturing overhead cost 15000 1 1.5 Fixed manufacturing overhead cost 75000 5 7.5 Predetermined overhead rate for the year 90000 6 9 Requirement Computation of standard direct labor hours allowed for the year's production Number of units produced 11000 Standard labor hour per unit 1.5 Standard direct labor hours allowed for the year's production 16500 Requirement Manufacturing Overhead Actual variable overhead 15750 work in process 99000 Actual fixed overhead 76500 Under applied overhead Under applied overhead 6750 99000 99000 Computation of variable overhead spending and efficiency variance Actual variable overhead cost Flexible budget Standard cost(VOH applied) AH X AVR 15750 Given AH X SVR =17500*1 SH X SVR =16500*1 15750 17500 16500 Difference 1750 Difference -1000 50800 Variable Overhead efficiency variance -1000 Unfavourable Variable Overhead spending variance 1750 Favorable Computation of fixed overhead spending and volume variance Actual fixed overhead cost Budgeted overhead Standard cost(FOH applied) AH X AFR 76500 Given SH X SFR 82500 76500 75000 82500 -1500 7500 Fixed Overhead volume variance 7500 Favorable Fixed Overhead Budget variance -1500 Unfavourable if denominator has 18000 direct labor hours, fixed overhead volume and budget variance would change which can be explaned with below computation Predetermined overhead rate for the year Amount Predetermined overhead rate for the year per DLH Predetermined overhead rate for the year per unit Variable manufacturing overhead cost 18000 1 1.8 Fixed manufacturing overhead cost 75000 4.166666667 7.5 Predetermined overhead rate for the year 93000 5.166666667 9.3 Manufacturing Overhead Actual variable overhead 15750 work in process 85250 Actual fixed overhead 76500 Under applied overhead Overapplied overhead 7000 92250 92250 Computation of variable overhead spending and efficiency variance Actual variable overhead cost Flexible budget Standard cost(VOH applied) AH X AVR 15750 Given AH X SVR =17500*1 SH X SVR =16500*1 15750 17500 16500 Difference 1750 Difference -1000 50800 Variable Overhead efficiency variance -1000 Unfavourable Variable Overhead spending variance 1750 Favorable Computation of fixed overhead spending and volume variance Actual fixed overhead cost Budgeted overhead Standard cost(FOH applied) AH X AFR 76500 Given SH X SFR 68750 76500 93000 68750 16500 -24250 Fixed Overhead volume variance -24250 Unfavourable Fixed Overhead Budget variance 16500 Favorable

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