11

Baird Company makes classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the companys planning budget, the following manufacturing overhead costs should be incurred at an activity level of 13,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost	$ 19,500
Fixed manufacturing overhead cost	45,500
Total manufacturing overhead cost	$ 65,000

During the most recent year, the following operating results were recorded:

Activity:
Actual labor-hours worked	10,000
Standard labor-hours allowed for the actual output	11,000
Cost:
Actual variable manufacturing overhead cost incurred	$ 23,000
Actual fixed manufacturing overhead cost incurred	$ 35,750

At the end of the year, the companys Manufacturing Overhead account contained the following data:

Manufacturing Overhead
Debit		Credit
Actual	58,750	Applied	55,000
	3,750

Management would like to determine the cause of the $3,750 underapplied overhead.

Required:

1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.

2. Show how the $55,000 Applied figure in the Manufacturing Overhead account was computed.

3. Break down the $3,750 underapplied overhead into four components: (1) variable overhead rate variance, (2) variable overhead efficiency variance, (3) fixed overhead budget variance, and (4) fixed overhead volume variance.