PROBLEM 10–25 Applying Overhead; Overhead Variances [LO4, LO5, LO6] Ryder Company produces a… 1 answer below »

  PROBLEM 10–25 Applying Overhead; Overhead Variances [LO4, LO5, LO6]

Ryder Company produces a single product, school backpacks made of a sturdy nylon fabric. The production of these bags requires a relatively large amount of labour time. Overhead cost is applied on the basis of standard direct labour-hours. The company’s condensed flexible bud- get for manufacturing overhead is given below:

 

 

 

Overhead Costs

(per DLH)

12,000

 

15,000

 

18,000

Variable manufacturing overhead cost . . . . . . . . . . . . . . . . . .

$1

$12,000

 

$ 15,000

 

$ 18,000

Fixed manufacturing overhead cost. . . . . . . . . . . . . . . . . . . . .

 

 75,000

 

  75,000

 

  75,000

Total manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . .

 

$87,000

 

$90,000

 

$93,000

 

Each backpack requires 2 metres of direct material that has a standard cost of $1.50 per metre. The product requires 1.5 hours of direct labour time. The standard labour rate is $10 per hour.

During the year, the company had planned to operate at a denominator activity level of 15,000 direct labour-hours and to produce 10,000 units of product. Actual activity and costs for the year were as follows:

 

Number of units produced. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,000

Actual direct labour-hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,500

Actual variable manufacturing overhead cost incurred. . . . . . . . . . . . . . . . .  .

$ 15,750

Actual fixed manufacturing overhead cost incurred. . . . . . . . . . . . . . . . . . . .  .

$76,500

 

Required:

1.              Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed components.

2.              a.    Compute the standard direct labour-hours allowed for the year’s production.

b.    Complete the following manufacturing overhead T-account for the year:

Manufacturing Overhead

 

3.              Determine the reason for the underapplied or overapplied overhead from (2) above by computing the variable overhead spending and efficiency variances and the fixed over- head budget and volume variances.

4.              Suppose the company had chosen 18,000 direct labour-hours as the denominator activity rather than 15,000 hours. State which, if any, of the variances computed in (3) above would have changed, and explain how the variance(s) would have changed. No computations are necessary.

 

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