Question
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
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 20,000 labor-hours (the denominator activity level):
Variable manufacturing overhead cost | $ 65,000 |
---|---|
Fixed manufacturing overhead cost | 105,000 |
Total manufacturing overhead cost | $ 170,000 |
During the most recent year, the following operating results were recorded:
Activity: | |
---|---|
Actual labor-hours worked | 17,000 |
Standard labor-hours allowed for the actual output | 18,000 |
Cost: | |
Actual variable manufacturing overhead cost incurred | $ 74,800 |
Actual fixed manufacturing overhead cost incurred | $ 90,000 |
At the end of the year, the companys Manufacturing Overhead account contained the following data:
Manufacturing Overhead | |||
---|---|---|---|
Debit | Credit | ||
Actual | 164,800 | Applied | 153,000 |
11,800 |
Management would like to determine the cause of the $11,800 underapplied overhead.
Required:
1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.
2. Show how the $153,000 Applied figure in the Manufacturing Overhead account was computed.
3. Break down the $11,800 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.
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