Lane Company manufactures a single product that requires a great deal of hand la

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 $5.20 per direct labor-hour and the budgeted fixed manufacturing overhead is $2,484,000 per year The standard quantity of materials is 4 pounds per unit and the standard cost is $11.00 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.60 per hour. The company planned to operate at a denominator activity level of 270,000 direct labor-hours and to produce 180,000 units of product during the most recent year. Actual activity and costs for the year were as follows: Actual number of units produced Actual direct labor-hours worked Actual variable manufacturing overhead cost incurred 1,053,000 Actual fixed manufacturing overhead cost incurred 216,000 351,000 $2,808,000 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.

Explanation / Answer

Solution:

1) Predetermined Overhead Rate

Predetermined Overhead Rate is the overhead rate calculated on predetermined basis (i.e. in advance or at the beginning of the period) to allocate the overhead expenses over the product by using suitable allocation base. Allocation base may be direct labor hours, direct labor cost, machine hours etc.

Predetermined Overhead Rate = Total Estimated Overhead Costs / Allocation Base

Here, we are not required to calculate overhead rate for variable manufacturing overhead since it is already given $5.20 per direct labor hours.

Overhead Rate for Fixed Manufacturing Overhead = Total Estimated Fixed Overhead Costs $2,484,000 / Total Estimated Direct labor hours 270,000 Hours

= $9.20 per direct labor hour

Hence, Predetermined Overhead Rate = Fixed Overhead Rate + Variable Overhead Rate = 9.20 + 5.20 = $14.40 per direct labor hour

Breaking the rate down into variable and fixed

Predetermined Overhead Rate

$14.40

per direct labor hour

Budgeted Variable Manufacturing Overhead Rate

$5.20

Per direct labor hour

Budgeted fixed manufacturing overhead rate

$9.20

Per direct labor hour

2) Standard Cost Card for the company’s product

Per Unit Quantity / hours required

Rate

Standard Cost per Unit

Direct materials

4

pounds at

$11

Per pound

$44

Direct labor

1.5

hours at

$13.60

per hour

$20

Manufacturing Overhead

1.5

hours at

$14.40

per hour

$22

Standard Cost per unit

$86

3a.

Standard direct labor hours allowed for the year’s production = Actual Production 216,000 Units x Allowed Standard Labor Hour Per Unit 1.5 Hours

= 324,000 Hours

3b. Manufacturing Overhead T-Account

Debit

Credit

Actual Overhead Incurred (1053,000 + 2808,000)

$3,861,000

$4,665,600

Applied Manufacturing Overhead (Note 1)

Over-Applied Overhead

(4665,600 – 3861,000)

$804,600

Note 1 --- Applied Manufacturing Overhead = Standard direct labor hours allowed for the year’s production324,000 x Predetermined Overhead Rate $14.40

= $4,665,600

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining part.

Predetermined Overhead Rate

$14.40

per direct labor hour

Budgeted Variable Manufacturing Overhead Rate

$5.20

Per direct labor hour

Budgeted fixed manufacturing overhead rate

$9.20

Per direct labor hour

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