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. The budgeted variable manufacturing overhead is $4.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,935,000 per year.

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. The budgeted variable manufacturing overhead is $4.60 per direct labor-hour and the budgeted fixed manufacturing overhead is $1,935,000 per year.

The standard quantity of materials is 4 pounds per unit and the standard cost is $9.50 per pound. The standard direct labor-hours per unit is 1.5 hours and the standard labor rate is $13.30 per hour.

The company planned to operate at a denominator activity level of 225,000 direct labor-hours and to produce 150,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Actual number of units produced		180,000
Actual direct labor-hours worked		292,500
Actual variable manufacturing overhead cost incurred	$	789,750
Actual fixed manufacturing overhead cost incurred	$	2,047,500

Required:

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

2. Prepare a standard cost card for the company’s product.

3a. Compute the standard direct labor-hours allowed for the year’s production.

3b. Complete the following Manufacturing Overhead T-account for the year.

4. Determine the reason for any underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances.

Explanation

1.

Total rate:	$2,970,000	= $13.20 per DLH
	225,000 DLHs

Variable rate:	$1,035,000	= $4.60 per DLH
	225,000 DLHs

Fixed rate:	$1,935,000	= $8.60 per DLH
	225,000 DLHs

3a.

180,000 units × 1.5 DLHs per unit = 270,000 standard DLHs.

3b.

Applied costs (270,000 standard DLHs × $13.20 per DLH) = $3,564,000

4.

Variable overhead variances:

Actual Hours of Input, at the Actual Rate (AH × AR)			Actual Hours of Input, at the Standard Rate (AH × SR)			Standard Hours Allowed for Output, at the Standard Rate (SH × SR)
$789,750			292,500 DLHs × $4.6 per DLH = $1,345,500			270,000 DLHs ×  $4.6 per DLH = $1,242,000
	Variable overhead rate variance, $555,750 F			Variable overhead efficiency variance, $103,500 U

Fixed overhead variances:

Actual Fixed Overhead			Budgeted Fixed Overhead			Fixed Overhead Applied to Work in Process
$2,047,500			$1,935,000*			270,000 DLHs × $8.6 per DLH = $2,322,000
	Budget Variance, $112,500 U			Volume Variance, $387,000 F

*Can be expressed as: 225,000 denominator DLHs × $8.60 per DLH = $1,935,000

The company's overhead variances can be summarized as follows:

Variable overhead:
Rate variance	$	555,750	F
Efficiency variance		103,500	U
Fixed overhead:
Budget variance		112,500	U
Volume variance		387,000	F
Overapplied overhead—see requirement 3B	$	726,750	F

Thanks