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Chapter 23: 9SE (page 1307)

Computing standard overhead allocation rates

The following information relates to Morgan, Inc.鈥檚 overhead costs for the month:

Static budget variable overhead

\(7,800

Static budget fixed overhead

\)3,900

Static budget direct labor hours

1,300 hours

Static budget number of units

5,200 units

Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute the standard variable overhead allocation rate and the standard fixed overhead allocation rate.

Short Answer

Expert verified

Standard variable overhead allocation rate:$6 per direct labor hour.

Standard fixed overhead allocation rate:$3 per direct labor hour.

Step by step solution

01

Definition of Direct Labor Cost

The cost incurred for all the employees directly attached to the production of the goods and services is known as direct labor cost. This cost depends upon the direct labor hours.

02

Standard variable overhead allocation rate

Standardvariableoverheadallocationrate=StaticbudgetvariableoverheadStaticbudgetdirectlaborhour=$7,8001,300hours=$6perdirectlaborhour

03

Standard fixed overhead allocation rate

Standardfixedoverheadallocationrate=StaticbudgetfixedoveheadStaticbudgetdirectlaborhour=$3,9001300hours=$3perdirectlaborhour

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Most popular questions from this chapter

Question: List the variable overhead variances, and briefly describe each

Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.

鈥淲hat鈥檚 taking so long?鈥� Drew asked. 鈥淲hen am I going to get the variance reports?鈥� Jeff sighed and attempted to explain the problem. 鈥淪ome of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.鈥� Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.

After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about clean颅up time between jobs or at the end of the day?

Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10颅 to 15颅minute breaks every hour, averaging about 1 hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any 鈥渄own time鈥� when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing clean颅up and attending department meetings.

Requirements

1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?

2. How might an employee鈥檚 time card show the employee on the job and working when the team member was not present?

3. Why would the employees鈥� activities be considered fraudulent?

Preparing a flexible budget performance report

Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company鈥檚 July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.

Cell One Technologies

Flexible budget

For month ended July 31, 2018

Budgeted amount per unit

Units

8,500

10,000

12,000

Sales revenue

\(24

\)204,000

\(240,000

\)288,000

Variable expenses

13

110,500

130,000

156,000

Contribution margin

93,500

110,000

132,000

Fixed expenses

57,000

57,000

57,000

Operating income

\(36,500

\)53,000

\(75,000

The company sold 12,000 units during July, and its actual operating income was as follows:

Cell One Technologies

Income statement

For the Month Ended July 31, 2018

Sales revenue

\)295,000

Variable expenses

161,100

Contribution margin

133,900

Fixed expenses

58,000

Operating income

$75,900

Requirements

1. Prepare a flexible budget performance report for July 2018.

2. What was the effect on Cell Plus鈥檚 operating income of selling 2,000 units more than the static budget level of sales?

3. What is Cell Plus鈥檚 static budget variance for operating income?

4. Explain why the flexible budget performance report provides more useful information to Cell Plus鈥檚 managers than the simple static budget variance. What insights can Cell Plus鈥檚 managers draw from this performance report?

Computing and journalizing standard cost variances

Middleton manufactures coffee mugs that it sells to other companies for customizing with their own logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Direct Materials (0.2 lbs. @ \(0.25 per lb.) \) 0.05

Direct Labor (3 minutes @ \(0.14 per minute) 0.42

Manufacturing Overhead:

Variable (3 minutes @ \)0.06 per minute) \( 0.18

Fixed (3 minutes @ \)0.13 per minute) 0.39 0.57

Total Cost per Coffee Mug \( 1.04

Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs.

c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb.

d. Actual direct labor usage of 197,000 minutes at a cost of \(33,490.

e. Actual overhead cost was \)10,835 variable and \(29,965 fixed.

f. Selling and administrative costs were \)130,000.

Requirements

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. Journalize the purchase and usage of direct materials and the assignment of direct

labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production from Work in Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.

5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Question:What is a standard cost income statement?
See all solutions

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