From Principles of Cost Accounting - 15th Edition - VanDerbeck
Madden Manufacturing, Inc., manufactures a single product and uses a standard cost system. The factory overhead is applied on the basis of direct labor hours. A condensed version of the company's flexible budget follows:
Direct labor hours 5,000 6,250 10,000
Factory Overhead Costs:
Variable Costs $10,000 $12,500 $20,000
Fixed Costs 50,000 50,000 50,000
Total $60,000 $62,500 $70,000
The product requires 3 pounds of materials at a standard cost of $5 per pound and 2 hours of direct labor at a standard cost of $10 per hour.
For the current year, the company planned to operate at the level of 6,250 direct labor hours and to produce 3,125 units of product. Actual production and costs for the year follow:
Number of units produced 3,500
Actual direct labor hours worked 7,000
Actual variable overhead costs incurred $14,000
Actual fixed overhead costs incurred $52,000
Required:
1) For the current year, compute the factory overhead rate that will be used for production. Show the variable and fixed components that make up the total predetermined rate to be used.
2) Prepare a standard cost card for the product. Show the individual elements of the overhead rate as well as the total rate.
3) Compute (a) standard hours allowed for production and (b) under- or over-applied factory overhead for the year.
4) Determine the reason for any under or over-applied factory overhead for the year by computing all variances, using each of the following methods:
a. Two-variance method
b. Three-variance method
c. Four-variance method