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 25,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost	$	112,500
Fixed manufacturing overhead cost		162,500
Total manufacturing overhead cost	$	275,000

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

Activity:
Actual labor-hours worked		22,000
Standard labor-hours allowed for the actual output		23,000
Cost:
Actual variable manufacturing overhead cost incurred	$	129,800
Actual fixed manufacturing overhead cost incurred	$	143,750

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

Manufacturing Overhead
Actual	273,550	Applied	253,000
	20,550

Management would like to determine the cause of the $20,550 underapplied overhead.

Required:

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

2. Show how the $253,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the $20,550 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.

1

Predetermined overhead rate		per hour
Variable element		per hour
Fixed element		per hour

2

actual hours worked/standard hour sallowed

per hour =

3

Variable overhead:
Rate variance
Efficiency variance
Fixed overhead:
Budget variance
Volume variance