Chap 010 A

Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
Appendix 10A
Predetermined Overhead Rates and
Overhead Analysis in a Standard Costing
System
Exercise 10A-1 (15 minutes)

1. The total overhead cost at the denominator level of activity must be
determined before the predetermined overhead rate can be computed.
Total fixed overhead cost per year................................. $600,000
Total variable overhead cost
($3.50 per DLH × 80,000 DLHs).................................. 280,000
Total overhead cost at the denominator level of activity. . $880,000
2. Standard direct labor-hours allowed for

the actual output (a)........................... 82,000 DLHs
Predetermined overhead rate (b)............ $11.00 per DLH
Overhead applied (a) × (b).................... $902,000
10A-1

1.
2.
10A-2

Company X: This company has an unfavorable volume variance
because the standard direct labor-hours allowed for the
actual output are less than the denominator activity.
Company Y: This company has an unfavorable volume variance
because the standard direct labor-hours allowed for the
actual output are less than the denominator activity.
Company Z: This company has a favorable volume variance because
the standard direct labor-hours allowed for the actual
output are greater than the denominator activity.
10A-3

1. Actual fixed overhead incurred........................... $79,000
Add favorable budget variance........................... 1,000
Budgeted fixed overhead cost............................ $80,000
2. 9,500 units × 2 MHs per unit = 19,000 MHs
3.
Alternative solutions to parts 1-3:

Fixed Overhead Applied Budgeted Fixed Actual Fixed
to Work in Process Overhead Overhead
19,000 MHsb ×
$4 per MHc = $76,000 $80,000a $79,000*
Volume variance Budget variance
= $4,000 U = $1,000 F*
*Given
a
$79,000 + $1,000 = $80,000
b
9,500 units × 2 MHs per unit = 19,000 MHs
c
$80,000 ÷ 20,000 denominator MHs = $4 per MH
10A-4

1.
Variable element: ($1.60 per DLH × 24,000 DLH) ÷ 24,000 DLHs =

$38,400 ÷ 24,000 DLHs = $1.60 per DLH
Fixed element: $84,000 ÷ 24,000 DLHs = $3.50 per DLH
2. Direct materials, 2 pounds × $4.20 per pound..................... $ 8.40

Direct labor, 3 DLHs* × $12.60 per DLH............................. 37.80
Variable manufacturing overhead, 3 DLHs × $1.60 per DLH. 4.80
Fixed manufacturing overhead, 3 DLHs × $3.50 per DLH..... 10.50
Total standard cost per unit............................................... $61.50
*24,000 DLHs ÷ 8,000 units = 3 DLHs per unit
10A-5

1.
2. The standard hours per unit of product are:

8,000 MHs ÷ 3,200 units = 2.5 MHs per unit
The standard hours allowed for the actual production would be:
3,500 units × 2.5 MHs per unit = 8,750 MHs
3. Variable overhead variances:

Variable overhead rate variance = (AH × AR) – (AH × SR)
= ($9,860) – (8,500 MHs × $1.05 per MH)
= ($9,860) – ($8,925)
= $935 U
Variable overhead efficiency variance = SR (AH – SH)
= $1.05 per MH (8,500 MHs – 8,750 MHs)
= $262.50 F
10A-6
Exercise 10A-6 (continued)

Fixed overhead budget and volume variances:
8,750 standard MHs
× $3.10 per MH
= $27,125 $24,800* $25,100
= $2,325 F = $300 U
Total Variance = $2,025 F
*8,000 denominator MHs × $3.10 per MH = $24,800.
Alternative approach to the budget variance:
Alternative approach to the volume variance:
10A-7

1. 10,000 units × 0.8 DLH per unit = 8,000 DLHs.
2. and 3.
8,000 standard DLHs ×
$6.00 per DLH*
= $48,000 $45,000 $45,600*
= $3,000 F* = $600 U
*Given.
4.
Therefore, the denominator activity was $45,000 ÷ $6.00 per DLH =

7,500 DLHs.
10A-8
Problem 10A-10 (45 minutes)

1.
2. 16,000 standard MHs × £5.75 per MH = £92,000
3. Variable manufacturing overhead variances:

Standard Hours Allowed Actual Hours of Input,
for Actual Output, Actual Hours of Input,
at Standard Rate at Standard Rate at Actual Rate
(SH × SR) (AH × SR) (AH × AR)
16,000 MHs × 15,000 MHs ×
£1.75 per MH £1.75 per MH
= £28,000 = £26,250 £26,500
Variable overhead Variable overhead
efficiency variance rate variance
= £1,750 F = £250 U
Alternative solution:
Variable overhead efficiency variance = SR (AH – SH)
= £1.75 per MH (15,000 MHs – 16,000 MHs)
= £1,750 F
Variable overhead rate variance = (AH × AR) – (AH × SR)
= (£26,500) – (15,000 MHs × £1.75 per MH)
= £250 U
10A-9
Problem 10A-10 (continued)

Fixed overhead variances:
16,000 MHs ×
£4 per MH
= £64,000 £72,000 £70,000
= £8,000 U = £2,000 F
Alternative solution:
Verification of variances:
Variable overhead efficiency variance............... £1,750 F
Variable overhead rate variance....................... 250 U
Fixed overhead volume variance...................... 8,000 U
Fixed overhead budget variance....................... 2,000 F
Underapplied overhead.................................... £4,500 U
10A-10
Problem 10A-10 (continued)

4. Variable overhead
Variable overhead rate variance: This variance includes both price and
quantity elements. The overhead spending variance reflects differences
between actual and standard prices for variable overhead items. It also
reflects differences between the amounts of variable overhead inputs
that were actually used and the amounts that should have been used
for the actual output of the period. Because the variable overhead
spending variance is unfavorable, either too much was paid for variable
overhead items or too many of them were used.
Variable overhead efficiency variance: The term “variable overhead
efficiency variance” is a misnomer, because the variance does not
measure efficiency in the use of overhead items. It measures the
indirect effect on variable overhead of the efficiency or inefficiency with
which the activity base is utilized. In this company, machine-hours is the
activity base. If variable overhead is really proportional to machine-
hours, then more effective use of machine-hours has the indirect effect
of reducing variable overhead. Because 1,000 fewer machine-hours
were required than indicated by the standards, the indirect effect was
presumably to reduce variable overhead spending by about £1,750
(£1.75 per machine-hour × 1,000 machine-hours).
Fixed overhead
Fixed overhead budget variance: This variance is simply the difference
between the budgeted fixed cost and the actual fixed cost. In this case,
the variance is favorable, which indicates that actual fixed costs were
lower than anticipated in the budget.
Fixed overhead volume variance: This variance occurs as a result of
actual activity being different from the denominator activity that was
used in the predetermined overhead rate. In this case, the variance is
unfavorable, so actual activity was less than the denominator activity. It
is difficult to place much of a meaningful economic interpretation on this
variance. It tends to be large, so it often swamps the other, more
meaningful variances if they are simply netted against each other.
10A-11

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Chapter 10A Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

Exercise 10A-1 (15 minutes)

2. Standard direct labor-hours allowed for

Exercise 10A-2 (15 minutes)

Exercise 10A-3 (10 minutes)

Exercise 10A-4 (15 minutes)

2. 9,500 units × 2 MHs per unit = 19,000 MHs

Alternative solutions to parts 1-3:

Exercise 10A-5 (15 minutes)

Variable element: ($1.60 per DLH × 24,000 DLH) ÷ 24,000 DLHs =

2. Direct materials, 2 pounds × $4.20 per pound..................... $ 8.40

*24,000 DLHs ÷ 8,000 units = 3 DLHs per unit

Exercise 10A-6 (20 minutes)

2. The standard hours per unit of product are:

3. Variable overhead variances:

Exercise 10A-6 (continued)

Alternative approach to the budget variance:

Alternative approach to the volume variance:

Exercise 10A-7 (15 minutes)

Therefore, the denominator activity was $45,000 ÷ $6.00 per DLH =

Problem 10A-10 (45 minutes)

2. 16,000 standard MHs × £5.75 per MH = £92,000

3. Variable manufacturing overhead variances:

Problem 10A-10 (continued)

Problem 10A-10 (continued)

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