Question

Kemp Manufacturing set 70,000 direct labor hours as the annual capacity measure for computing its predetermined variable overhead rate. At that level, budgeted variable overhead costs are $315,000. Kemp will apply budgeted fixed overhead of $140,400 on the basis of 3,900 budgeted machine hours for the year. Both machine hours and fixed overhead costs are expected to be incurred evenly each month. During March 2013, Kemp incurred 5,900 direct labor hours and 300 machine hours. Actual variable and fixed overhead were $26,325 and $11,400, respectively. The standard times allowed for March production were 5,980 direct labor hours and 290 machine hours.

Required:
a. Using the four-variance approach, determine the overhead variances for March 2013.
b. Prepare all journal entries related to overhead for Kemp Manufacturing for March 2013.

Answer 1

Answer:

Kemp Manufacturing

a. Four-variance approach to determine overhead variances for March 2013:

i. Variable overhead spending variance

= (Actual hours worked × Actual variable overhead rate) – (Actual hours worked × Standard variable overhead rate)

= $225 F ($26,325 - $26,550)

ii. Variable overhead efficiency variance

= (standard hours allowed for production – actual hours taken) × standard overhead absorption rate per hour

= $360 F (5,980 - 5,900) * $4.5

iii. Fixed overhead spending variance = actual fixed overhead cost - budgeted fixed overhead cost

= $600 U ($11,400 - $10,800)

iv. Fixed overhead production volume variance = budgeted fixed overhead - applied fixed overhead costs

= $360 U ($10,440 - $10,800)

b. Journal Entries:

Manufacturing Overheads:

Debit Manufacturing Overhead $26,325

Debit Overapplied Variable Overhead 225

Credit Manufacturing Overhead Applied $26,550

To record variable overhead costs.

Debit Manufacturing Overhead $11,400

Credit Manufacturing Overhead Applied $10,800

Credit Underapplied Fixed Overhead $600

To record fixed overhead costs.

Explanation:

a) Data and Calculations:

Annual Capacity:

Direct labor hours = 70,000

Budgeted variable overhead costs = $315,000

Standard variable overhead rate = $4.50 ($315,000/70,000)

Fixed overhead = $140,400

Budgeted machine hours for the year = 3,900

Standard fixed overhead rate = $36 ($140,400/3,900)

March 2013:

Actual direct labor hours = 5,900

Machine hours = 300

Actual variable overhead = $26,325

Actual variable overhead rate per DLH = $4.462 ($26,325/5,900)

Actual fixed overhead = $11,400

Actual fixed overhead rate = $38 ($11,400/300)

Standard machine hours = 290

Standard direct labor hours = 5,980