MicroDrive Corporation Predetermined Overhead Rate

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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
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