Scott Company's variable manufacturing overhead should be $2.50 per standard direct labor-hour and fixed manufacturing overhead should be $320,000 per year. The company produces a single product that requires 2.5 direct labor-hours to complete. The direct labor wage rate is $20 per hour. Three yards of raw material are required for each unit of product, at a cost of $5 per yard.
Demand for the company's product differs widely from year to year. Expected activity for this year is 50,000 direct labor-hours; normal activity is 40,000 direct labor-hours per year.
Required:
1. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into fixed and variable cost components.
2. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Repeat the computations in (1) above.
3. Complete two standard cost cards as outlined below.
Denominator Activity: 40,000 DLHs
Direct materials, 3 yards at $5 per yard . . . . . . $ 15.00
Direct labor, . . . . . . . . . . . . . . . . . . . . . . . . . . $ ?
Variable manufacturing overhead, . . . . . . . . .$ ?
Fixed manufacturing overhead, . . . . . . . . . . . $ ?
Total standard cost per unit . . . . . . . . . . . . . . . $ ?
Denominator Activity: 50,000 DLHs
Direct materials, 3 yards at $5 per yard . . . . . . $ 15.00
Direct labor, . . . . . . . . . . . . . . . . . . . . . . . . . .$ ?
Variable manufacturing overhead, . . . . . . . . .$ ?
Fixed manufacturing overhead, . . . . . . . . . . .$ ?
Total standard cost per unit . . . . . . . . . . . . . . . $ ?
4. Assume that 48,000 actual hours are worked during the year, and that 18,500 units are produced. Actual manufacturing overhead costs for the year are as follows:
Variable manufacturing overhead cost . . . . . . . $124,800
Fixed manufacturing overhead cost . . . . . . . . . $321,700
Total manufacturing overhead cost . . . . . . . . . . $446,500
a. Compute the standard hours allowed for the year's actual output.
b. Compute the missing items from the Manufacturing Overhead account below. Assume that the company uses 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing overhead rates, as you have used in (1) above.
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c. Analyze your under applied or over applied overhead balance in terms of variable overhead rate and efficiency variances and fixed overhead budget and volume variances.
5. Looking at the variances that you have computed, what appears to be the major disadvantage of using normal activity rather than expected actual activity as a denominator in computing the predetermined overhead rate? What advantages can you see to offset this disadvantage?