Huggins Manufacturing Company uses a job order cost system and

standard costs. It manufactures one product, whose standard cost follows:

Materials, 10 yards@$2.00 per yard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20

Direct labor, 4 hours@$12.00 per hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Total factory overhead per unit (the ratio of variable costs to fixed costs is 2 to 1) . . . . 42

Total unit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110

The standards are based on normal capacity of 3,600 direct labor

hours. Actual activity for October follows:

Materials purchased, 20,000 yards@$1.95 per yard . . . . . . . . . . . . . . . . . . . . . . $39,000

(Materials used, 19,500 yards)

Direct labor, 3,500 hours@12.10 per hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,215

Total factory overhead, 900 units actually produced . . . . . . . . . . . . . . . . . . . . . . 37,500

Required:

1. Compute the variable and fixed factory overhead rates per unit.

2. Compute the variable and fixed overhead rates per direct labor hour.

3. Determine the total fixed factory overhead based on normal capacity.

SOLUTION TO SELF-STUDY PROBLEM

1. Compute the variable and fixed factory overhead rates per unit:

We know that the total factory overhead cost per unit is $42 and the

variable rate is twice the fixed rate; therefore:

Let X the fixed factory overhead rate, and

2X the variable factory overhead rate, then

2X X $42

3X $42

X $14 fixed factory overhead rate per unit

2X $28 variable factory overhead rate per unit

Compute the variable and fixed overhead rates per direct labor hour:

In (1), we determined that the variable factory overhead rate was

$28 per unit and the fixed factory overhead rate was $14 per unit.

The problem indicates that the standard number of direct labor hours

to make a unit is four. Therefore:

Variable factory overhead rate per direct labor hour = $28/4 direct labor hours = $7

Fixed factory overhead rate per direct labor hour = $14/4 direct labor hours = $ 3.50

3. Determine the total fixed factory overhead based on normal capacity.

We know from above that the fixed factory overhead rate computed

at normal capacity is $3.50 per direct labor hour. The problem

indicated that the standards were based on a normal capacity of

3,600 direct labor hours. Therefore:

Total fixed factory overhead

$3:50 _ 3; 600 direct labor hours at normal capacity $12; 600

(Note that the fixed factory overhead stays the same in total but

varies per unit within a relevant range of activity. At any capacity

level other than 3,600 hours, the rate will be something other than

$3.50, but the budgeted total will still be $12,600.)