Lane Company manufactures a single product that requires a great deal of hand labour. Overhead cost is applied on the basis of direct labour-hours. The company’s condensed flexible budget for manufacturing overhead is given below:

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; show the details for all manufacturing costs on your standard cost card.
3. Do the following:
(a) Compute the standard hours allowed for the year’s production.
(b) Complete the following manufacturing overhead T-account for the year:

4. Determine the reason for any under- or overapplied overhead for the year by computing the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.
5. Suppose the company had chosen 65,000 direct labour-hours as the denominator activity rather than 60,000 hours. State which, if any, of the variances computed in Requirement 4 above would have changed, and explain how the variance(s) would have changed. No computations are necessary.

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Overhead costs Variable costs Fixed costs Total overhead cost Cost formula (per direct labour-hour) £2 45,000 £90,000 480,000 £570,000 Number of units produced Actual direct labour-hours worked Actual variable overhead cost incurred Actual fixed overhead cost incurred Direct labour-hours 60,000 £120,000 480,000 £600,000 The company's product requires 3 kilos of material that has a standard cost of £7 per kilo and 1.5 hours of direct labour time that has a standard rate of £6 per hour. 42,000 65,000 £123,500 483,000 75,000 £150,000 480,000 £630,000 The company planned to operate at a denominator activity level of 60,000 direct labour-hours and to produce 40,000 units of product during the most recent year. Actual activity and costs for the year were as follows: