Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. Variable manufacturing overhead should be $3.60 per standard direct labor-hour and fixed manufacturing overhead should be $1,140,000 per year.

The company’s product requires 4 pounds of material that has a standard cost of $7.00 per pound and 1.5 hours of direct labor time that has a standard rate of $12.80 per hour.
The company planned to operate at a denominator activity level of 150,000 direct labor-hours and to produce 100,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Number of units produced 120,000
Actual direct labor-hours worked 195,000
Actual variable manufacturing overhead cost incurred $429,000
Actual fixed manufacturing overhead cost incurred $1,170,000

Required:
a. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements. (Round your answers to 2 decimal places.)
b. Prepare a standard cost card for the company's product (Round your answers to 2 decimal places.)
c. Compute the standard direct labor-hours allowed for the year's production.
d. Determine the reason for the underapplied or overapplied overhead from above by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

a. The predetermined overhead rate is $11.20.

b. The standard cost is prepared below.

c. The standard direct labor is 180,000 hours.

d The reason is given below.

Calculation of the predetermined overhead rate, standard cost:

1. Predetermined overhead rate for the year = Budgeted overhead ÷ Budgeted labor hours

= (150,000 × $3.40) + $1,140,000) ÷ 150,000

= $11.20 per direct labor hour

Variable overhead rate per labor hour = $3.60

Fixed overhead rate per labor hour = $7.60

2.                       Standard cost Card - Lane Company

Particulars              Qty                   Rate                        Per unit

Direct material        4 Pound at     $7.00 Per Pound   $28.00

Direct labor             1.5 DLHs at     $12.80 Per DLH     $19.20

Variable overhead  1.5 DLHs at     $3.60 Per DLH      $5.40

Fixed overhead       1.5 DLHs at      $7.60 Per DLH     $11.40

Standard cost per unit                                                  $64.00

3. Standard direct labor-hours allowed for the year’s production = Number of units produced × Direct labor time

= 120,000 × 1.50

= 180,000 hours

4. Actual rate of variable overhead = $429,000 ÷ 195,000

= $2.20 per labor hour

Variable overhead rate variance = (SR - AR) × AH

= ($3.60 - $2.20) × 195,000

= $273,000 F

Variable overhead efficiency variance = (SH - AH) × SR

= (180,000 - 195,000) × $3.60

= $54,000 U

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead

= $1,140,000 - $1,170,000

= $30,000 U

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead

= (180,000 × $7.60) - $1,140,000

= $228,000 F

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