ACME manufacturing is a low-cost producer of a single, commodity product: RGL-01. Standard overhead cost information for one unit of this product is presented below:
Standard number of machine hours per unit produced............................0.5
Standard variable overhead rate per machine hour............................$30.00
Budgeted fixed overhead (for the year).............................................$300,000
Practical capacity, in units (annual basis)...............................................10,000
Budgeted output for the coming year, in units.......................................8,000
Normal capacity, in units (per year)..........................................................9,000
Actual production for the year (in units)..................................................9,200
Actual overhead costs incurred during the year:
Fixed overhead....................................................................................$ 288,000
Variable overhead................................................................................$142,600
Actual number of machine hours per unit for work done this period..0.49

Required

1. Calculate the fixed overhead application rate per machine hour (rounded to 2 decimal places) using (a) budgeted output, (b) normal capacity, and (c) practical capacity.

2. What is the total overhead application rate per machine hour (rounded to 2 decimal places) for each of the three choices identified in requirement 1?

3. What is the total overhead variance for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

4. What is causing the results you observe in requirement 3?

5. What is the Overhead Efficiency Variance (= Variable Overhead Efficiency Variance) for the year when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity? [Round answers to nearest whole number, and indicate whether each variance is favorable (F) or unfavorable (U).]

6. Provide an interpretation of the results reported in requirement 5.

7. What is the total Overhead Spending Variance for the year under each of the following assumptions regarding the denominator activity level used to set the overhead application rate for the year: (a) budgeted output, (b) normal capacity, and (c) practical capacity? Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

8. Break down the Total Overhead Spending Variance (as determined in requirement 7) into: (a) a Fixed Overhead Spending Variance, and (b) a Variable Overhead Spending Variance. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

9. Provide an interpretation of the results reported in requirements 7 and 8.

10. Calculate the Production Volume Variance when the overhead application rate per machine hour is determined under each of the following options: (a) budgeted output, (b) normal capacity, and (c) practical capacity. Round answers to nearest whole dollar, and state whether each variance is favorable (F) or unfavorable (U).

11. Provide an interpretation of the results reported in requirement 10.

12. Summary analysis: Prepare a four-variance analysis of the total overhead variance for the period under each of the following options for determining the fixed overhead application rate: (a) budgeted output, (b) normal capacity, and (c) practical capacity.

13. Provide summary journal entries at the end of the year to (a) record all four overhead cost variances (calculated above, in requirement 12) and (b) to close the variances to Cost of Goods Sold (CGS). Assume that variances were determined using “practical capacity” as the denominator volume level for establishing the fixed overhead application rate and the total overhead application rate. Also assume that the company uses a single account, Factory Overhead, to record overhead costs.