Problem 10A-9 Applying Overhead; Overhead Variances [LO10-3, LO10-4]

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 29,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost	$	159,500
Fixed manufacturing overhead cost		217,500
Total manufacturing overhead cost	$	377,000

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

Activity:
Actual labor-hours worked		26,000
Standard labor-hours allowed for the actual output		27,000
Cost:
Actual variable manufacturing overhead cost incurred	$	184,600
Actual fixed manufacturing overhead cost incurred	$	195,750

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

Manufacturing Overhead
Actual	380,350	Applied	351,000
	29,350

Management would like to determine the cause of the $29,350 underapplied overhead.

Required:

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

2. Show how the $351,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the $29,350 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.