Lane Company manufactures a single product that requires a great deal of hand la
ID: 2563315 • Letter: L
Question
Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. The budgeted variable manufacturing overhead is $2.20 per direct labor-hour and the budgeted fixed manufacturing overhead is $279,000 per year.
The standard quantity of materials is 4 pounds per unit and the standard cost is $3.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $12.10 per hour.
The company planned to operate at a denominator activity level of 45,000 direct labor-hours and to produce 30,000 units of product during the most recent year. Actual activity and costs for the year were as follows:
Required:
1. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements.
2. Prepare a standard cost card for the company’s product.
3a. Compute the standard direct labor-hours allowed for the year’s production.
3b. Complete the following Manufacturing Overhead T-account for the year.
4. Determine the reason for the underapplied or overapplied overhead from (3) above by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.
Actual number of units produced 36,000 Actual direct labor-hours worked 58,500 Actual variable manufacturing overhead cost incurred $ 87,750 Actual fixed manufacturing overhead cost incurred $ 321,750Explanation / Answer
Solution:
1) Predermined Overhead Rate
Overheads are the indirect expenses which do not have the direct relation with the production or job. Overheads are incurred normally for the period, hence it is considered as period cost.
Overheads are generally allocated to the production department on some suitable basis. Suitable basis depends on the company’s policy. Suitable basis may be Direct Labor Cost, Direct Labor hour, machine hours etc.
In the question, the overheads are allocated on the basis of Direct Labor hour. So we need to calculate the predetermined overhead rate to allocate the overhead.
Predetermined Fixed Overhead Rate (on direct labor hour) = Estimated Fixed Overhead Cost / Estimated Direct labor hour
= $279,000 / 45,000 direct labor hours
= $6.20 per direct labor hour
Break down the overhead rate
Total Predetermined Overhead Rate
(Fixed +Variable)
$8.40 per direct labor hour
($2.20 + $6.20)
Variable Manufacturing Overhead Rate
$2.20 per direct labor hour
Fixed Manufacturing Overhead Rate
$6.20 per direct labor hour
2) Standard Cost card
(a)
(b)
(a*b)
Per Unit Quantity required
Rate
Standard Cost
Direct material cost
4 pounds
$3.50 per pound
$14.00
Direct labor cost
1.50 hour
$12.10 per hour
$18.15
Applied Manufacturing Overhead
1.50 hour
$8.40 per hour
$12.60
Standard Cost per unit
$44.75
3a. –
the standard direct labor-hours allowed for the year’s production = Actual Production 36,000 Units x 1.50 Hour per unit standard hour required
= 54,000 Direct labor hours
3b). Manufacturing Overhead (T-Account)
Manufacturing Overhead
Variable Manufacturing Overhead Incurred
$87,750
Applied Overhead
(standard direct labor-hours allowed for the year’s production 54,000 DLHs x Rate $8.40)
$453,600
Fixed Manufacturing Overhead Incurred
$321,750
Over Applied overhead
$44,100
$453,600
$453,600
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Pls ask separate question for remaining part.
Total Predetermined Overhead Rate
(Fixed +Variable)
$8.40 per direct labor hour
($2.20 + $6.20)
Variable Manufacturing Overhead Rate
$2.20 per direct labor hour
Fixed Manufacturing Overhead Rate
$6.20 per direct labor hour
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