Asked by Isabella Cardenas on May 20, 2024
Verified
Flick Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed manufacturing overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed manufacturing overhead.
Required:
a. What is the denominator level of activity?
b. What were the standard hours allowed for the output last year?
c. What was the variable overhead rate variance?
d. What was the variable overhead efficiency variance?
e. What was the fixed manufacturing overhead budget variance?
f. What was the fixed manufacturing overhead volume variance?
Denominator Level
The level of activity chosen to allocate fixed costs in absorption costing, often representing capacity or expected production volume.
Variable Overhead Rate
the rate at which variable overhead costs are applied to units of production, often used in calculating the total cost of producing a product.
Fixed Manufacturing
Costs associated with manufacturing that remain constant, regardless of the level of production, such as rent for factory premises.
- Estimate the variable overhead rate and measure efficiency discrepancies.
- Explore the consequences of variances that are either advantageous or disadvantageous.
- Recognize the deviation between budgeted and actual results.
Verified Answer
$2.50 per direct labor-hour = ($20,000 + $30,000) ÷ Estimated total amount of the allocation base
Estimated total amount of the allocation base = ($20,000 + $30,000) ÷ $2.50 per direct labor-hour
Estimated total amount of the allocation base = $50,000 ÷ $2.50 per direct labor-hour
Estimated total amount of the allocation base = 20,000 direct labor-hours
b. Standard hours allowed for the actual output = Actual output × Standard hours per unit
= 11,500 units × 2 direct labor-hours per unit
= 23,000 direct labor-hours
c. Variable overhead rate variance = (Actual hours × Actual rate) − (Actual hours × Standard rate)
= $22,500 − (22,000 direct labor-hours × $1.00 per direct labor-hour*)
= $22,500 − $22,000
= $500 Unfavorable
*$20,000 ÷ 20,000 direct labor-hours = $1.00 per direct labor-hour
d. Variable overhead efficiency variance = (Actual hours − Standard hours) × Standard rate
= (22,000 direct labor-hours − 23,000 direct labor-hours*) × $1.00 direct labor-hour
= −1,000 direct labor-hours × $1.00 direct labor-hour
= $1,000 Favorable
* 11,500 units × 2 direct labor-hours per unit = 23,000 direct labor-hours
e. Budget variance = Actual fixed manufacturing overhead − Budgeted fixed manufacturing overhead
= $31,000 − $30,000
= $1,000 Unfavorable
f. Volume variance = Fixed portion of predetermined overhead rate ×
(Denominator hours − Standard hours allowed)
= $1.50 per direct labor-hour* × (20,000 direct labor-hours − 23,000 direct labor-hours)
= $1.50 per direct labor-hour × −3,000 direct labor-hours
= $4,500 Favorable
*$30,000 ÷ 20,000 direct labor-hours = $1.50 per direct labor-hour
Learning Objectives
- Estimate the variable overhead rate and measure efficiency discrepancies.
- Explore the consequences of variances that are either advantageous or disadvantageous.
- Recognize the deviation between budgeted and actual results.
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