Highland Shortbread, Ltd. , of Aberdeen, Scotland, produces a single product and uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard machine-hours. According to the company's flexible budget, the following overhead costs should be incurred at an activity level of 18,000 machine-hours (the denominator activity level chosen for the year):

Variable manufacturing overhead cost . . . . . . . £ 31,500

Fixed manufacturing overhead cost . . . . . . . . . 72,000

Total manufacturing overhead cost . . . . . . . . . . £103,500

During the year, the following operating results were recorded:

Actual machine-hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000

Standard machine-hours allowed . . . . . . . . . . . . . . . . . . . . . . . 16,000

Actual variable manufacturing overhead cost incurred . . . . . . . £26,500

Actual fixed manufacturing overhead cost incurred . . . . . . . . . . £70,000

At the end of the year, the company's Manufacturing Overhead account contained the following data:

Management would like to determine the cause of the £4,500 underapplied overhead.

Required:
1. Compute the predetermined overhead rate for the year. Break it down into variable and fixed cost elements.
2. Show how the £92,000 "Applied costs" figure in the Manufacturing Overhead account was computed.
3. Analyze the £4,500 underapplied overhead figure in terms of the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.
4. Explain the meaning of each variance that you computed in (3)above.

Transcribed Image Text:

Manufacturing Overhead Actual costs 96,500 Applied costs 92,000 4,500