PROBLEM 10–21 Applying Overhead; Overhead Variances [LO4, LO5, LO6]

 

The Scottish firm of Cullen and MacNeil produces a single product and uses a standard cost- ing system to help control costs. Manufacturing overhead is applied to production on the basis of standard machine-hours. The Scottish currency is the British pound. According to the com- pany’s flexible budget, the following overhead costs should be incurred at an activity level of 18,000 machine-hours (the denominator activity level chosen for the year):

 

 

 

Variable manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	£ 31,500
Fixed manufacturing overhead cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	72,000
Total manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	£103,500

 

 

 

During the year, the following operating results were recorded:

 

 

 

Actual machine-hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15,000
Standard machine-hours allowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16,000
Actual variable manufacturing overhead cost incurred. . . . . . . . . . . . . . . . . . . . . . . . . . . .	£26,500
Actual fixed manufacturing overhead cost incurred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	£70,000

 

 

 

At the end of the year, the company’s Manufacturing Overhead account contained the fol- lowing data:

 

Manufacturing   Overhead

 

 

 

 

 

 

Management would like to determine the cause of the £4,500 underapplied  overhead.

 

Required:

 

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

 

2.              Show how the £92,000 “Applied costs” figure in the manufacturing overhead account was computed.

 

3.              Analyze the £4,500 underapplied overhead figure in terms of the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.

 

4.              Explain the meaning of each variance that you computed in (3) above.