MicroDrive Corporation Predetermined Overhead Rate • For the coming year, MicroDrive planned (budgeted) to produce 25,000 motors, with each motor taking 2 machine-hours (MHs) to produce. The activity base (denominator level of activity) is thus 50,000 machine-hours. • The predetermined overhead rate at MicroDrive Corporation is computed below: Denominator activity: 50,000 MHs Variable element: ($75,000 ÷ 50,000 MHs) ..... $ 1.50 per MH Fixed element: ($300,000 ÷ 50,000 MHs) ....... 6.00 per MH Predetermined overhead rate ......................... $7.50 per MH Applying Overhead in a Standard Cost System Note that the denominator level of activity at MicroDrive Corporation is 50,000 MHs. The following data apply to the current year’s operations. Budgeted Production Standard MHs per unit Denominator level of activity ................ Number of units completed .................. Actual machine-hours........................... Standard machine-hours allowed .......... Actual manufacturing overhead cost: Variable ............................................ Fixed ................................................ Total ................................................... 25,000 2 50,000 20,000 42,000 40,000 Units MHs MHs Units MHs MHs $ 71,000* 308,000 $379,000 *Actual Variable manufacturing overhead cost: $1.69 Per MH Applying Overhead in a Standard Cost System In a standard cost system, overhead is applied on the basis of the standard hours allowed for the actual output rather than on the basis of the actual hours. This results in a simpler system in which the overhead applied to units is always the same. In this example, the overhead cost is always $15 per unit (2.0 MHs per unit × $7.50 per MH) Using the above data, the company’s manufacturing overhead account would appear as follows: Actual Var. OH cost Actual Fixed OH cost Actual Total OH cost Manufacturing Overhead 71,000 60,000 Applied Var. OH cost 308,000 240,000 Applied Fixed OH cost 379,000 300,000* Applied Total OH cost 79,000 Underapplied overhead * 20,000 units × 2.0 MHs per unit × $7.50 per MH = $300,000. Variable Overhead Variances The variable overhead variances for MicroDrive Corporation are computed below: Actual Hours of Actual Hours of Standard Hours Input, at the Input, at the Allowed for Output, Actual Rate Standard Rate at the Standard Rate (AH × AR) (AH × SR) (SH × SR) 42,000 MHs x 42,000 MHs × 40,000 MHs × $1.69 per MH $1.50 per MH $1.50 per MH = $63,000 = $60,000 $71,000 Spending Variance, Efficiency Variance, $8,000 U $3,000 U Variable Overhead Variances • Spending variance: The variable overhead spending variance contains differences between actual and standard prices and between actual and standard quantities. • Efficiency variance: The variable overhead efficiency variance is not a measure of how efficiently overhead resources were used. It is a measure of the efficiency with which the base underlying the flexible budget was used. Fixed Overhead Variances Data concerning MicroDrive Corporation are presented below: Denominator activity (machine-hours) ..................... Actual machine-hours worked ................................. Standard machine-hours allowed for output............. Number of units produced ...................................... Budgeted fixed overhead cost ................................. Actual fixed overhead cost incurred......................... Fixed element of the predetermined overhead rate .. 50,000 42,000 40,000 20,000 $300,000 $308,000 $6 MHs MHs MHs units Fixed Overhead Variances Using these data, an analysis of the company’s fixed overhead variances follows: Actual Fixed Overhead Cost Budgeted Fixed Overhead Cost Fixed Overhead Cost Applied to Work in Process 40,000 MHs × $6 per DLH = $240,000 $300,000 $308,000 Budget Variance, Volume Variance, $8,000 U $60,000 U Summary of Variances • In a standard costing system, under or overapplied overhead equals the sum of: • Variable overhead spending variance • Variable overhead efficiency variance • Fixed overhead budget variance • Fixed overhead spending variance • Underapplied overhead is equivalent to a net unfavorable variance. • Overapplied overhead is equivalent to a net favorable variance. Summary of Variances Thus, MicroDrive Corporation’s $79,000 underapplied overhead can be explained as follows: Variable overhead: Spending variance................. $ 8,000 Efficiency variance................. 3,000 Fixed overhead: Budget variance .................... 8,000 Volume variance.................... 60,000 Underapplied overhead ............ $79,000 U U U U U Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the spending variance? a. $450 U b. $450 F c. $700 F d. $700 U Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual variable overhead for the period was $10,950. Actual direct labor hours worked were 2,050. The predetermined variable overhead rate is $5 per direct labor hour. What was the efficiency variance? a. $450 U b. $450 F c. $250 F d. $250 U Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the budget variance? a. $350 U b. $350 F c. $100 F d. $100 U Quick Check Yoder Enterprises’ actual production for the period required 2,100 standard direct labor hours. Actual fixed overhead for the period was $14,800. The budgeted fixed overhead was $14,450. The predetermined fixed overhead rate was $7 per direct labor hour. What was the volume variance? a. $250 U b. $250 F c. $100 F d. $100 U