PROBLEM 10–28 Selection of a Denominator; Overhead Analysis; Standard Cost Card [LO1, LO4, LO5, LO6]

Flores Company’s condensed flexible budget for manufacturing overhead is as follows:

 

 

Overhead Costs	(per DLH)	30,000	Â	40,000	Â	50,000
Variable manufacturing overhead cost . . . . . . . . . . . .	$2.50	$ 75,000	Â	$ 100,000	Â	$ 125,000
Fixed manufacturing overhead cost. . . . . . . . . . . . . . .	Â	  320,000	Â	  320,000	Â	 320,000
Total manufacturing overhead cost . . . . . . . . . . . . . .  .	Â	$395,000	Â	$420,000	Â	$445,000

 

The company produces a single product that requires 2.5 direct labour-hours to complete. The direct labour wage rate is $20 per hour. Three metres of raw material are required for each unit of product, at a cost of $5 per metre.

Demand for the company’s product differs widely from year to year. Expected activity for this year is 50,000 direct labour-hours; normal activity is 40,000 direct labour-hours per  year.

Required:

1.              Assume that the company chooses 40,000 direct labour-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into fixed and vari- able cost components.

2.              Assume that the company chooses 50,000 direct labour-hours as the denominator level of activity. Repeat the computations in (1) above.

3.              Complete two standard cost cards as outlined below:

 

 

 

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 labour-hours (normal activity) as the denomina- tor activity figure in computing overhead rates, as in (1) above:

Manufacturing Overhead

 

c.       Analyze your underapplied or overapplied overhead balance in terms of variable overhead spending 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 disadvan- tage 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?