Question
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
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 companys planning budget, the following manufacturing overhead costs should be incurred at an activity level of 14,000 labor-hours (the denominator activity level):
Variable manufacturing overhead cost | $ | 24,500 |
Fixed manufacturing overhead cost | 52,500 | |
Total manufacturing overhead cost | $ | 77,000 |
During the most recent year, the following operating results were recorded:
Activity: | ||
Actual labor-hours worked | 11,000 | |
Standard labor-hours allowed for the actual output | 11,500 | |
Cost: | ||
Actual variable manufacturing overhead cost incurred | $ | 28,600 |
Actual fixed manufacturing overhead cost incurred | $ | 42,000 |
At the end of the year, the companys Manufacturing Overhead account contained the following data:
Manufacturing Overhead | |||
Actual | 70,600 | Applied | 63,250 |
7,350 |
Management would like to determine the cause of the $7,350 underapplied overhead.
Required:
1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements.
2. Show how the $63,250 Applied figure in the Manufacturing Overhead account was computed.
3. Breakdown the $7,350 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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