Chilczuk, S.A., of Gdansk, Poland, is a major producer of 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 company's planning budget, the following manufacturing overhead costs should be incurred at an activity level of 17,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost$42,500Fixed manufacturing overhead cost76,500Total manufacturing overhead cost$119,000

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

Activity:Actual labor-hours worked14,000Standard labor-hours allowed for the actual output15,000Cost:Actual variable manufacturing overhead cost incurred$49,000Actual fixed manufacturing overhead cost incurred$63,750

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

Manufacturing OverheadActual112,750Applied105,0007,750

Management would like to determine the cause of the $7,750 underapplied overhead.

Required:

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

2. Show how the $105,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the $7,750 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.