Question on Stad. costing - Overapplied and underapplied

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Anil

1638 Points Joined October 2007

Please anyone help me solve below two questions.(Step by Step):

I have mentioned the correct answer below the questions.

1^st Question:

Lee Manufacturing uses a standard cost system with overhead applied based upon direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information.

Direct Labor(10000 hours at $15 per hour) $150000

Variable overhead 30000

Fixed overhead 80000

During May, 6,000 units were produced and the fixed overhead budget variance was $2,000 favorable. Fixed overhead during May was

underapplied by $16,000.
overapplied by $18,000.
overapplied by $16,000.
underapplied by $2,000

Correct Answer : overapplied by $18,000.

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2^nd Question:

Wagner Corporation applies factory overhead based upon machine hours. At the beginning of the year, Wagner budgeted factory overhead at $250,000 and estimated that 100,000 machine hours would be used to make 50,000 units of product. During the year, the company produced 48,000 units, using 97,000 machine hours. Actual overhead for the year was $252,000. Under a standard cost system, the amount of factory overhead applied during the year was

$240,000.
$252,000.
$250,000.
$242,500.

Correct Answer : $240,000

Replies (5)

Manmohan ACA, CS

Chartered Accountant

14243 Points Joined February 2009

Fixed overhead expenditure Variance

= Budgeted fixed Overhead - Actual fixed overhead

= 2000 (Favourable)

Fixed Overhead Volume Variance = (actual quantity - Budgeted quantity ) x Budgeted rate per unit

= (6000-5000) x 16

= 16000 (Favourable)

We know that Total Fixed over variance implies fixed overhead over or under applied

Total Fixed over variance = Fixed overhead expenditure Variance + Fixed Overhead Volume Variance

= 2000 +16000

= 18000 (Favourable)

working = Budgeted rate per unit

= Budgeted fixed overhead / budgeted unit

= 80000 /5000 = 16

Manmohan ACA, CS

Chartered Accountant

14243 Points Joined February 2009

There are two formulas for computing Fixed Overhead Applied

= (actual quantity x Budgeted rate per unit )

= (Standard Hour - Budgeted Hour ) x Budgeted rate per hour

Using formula two ( as it is given in sums that Wagner Corporation applies factory overhead based upon machine hours.)

(Standard Hour x Budgeted rate per hour )

= 48000 x 5 = 240000

Anil

1638 Points Joined October 2007

Thank you sir. You have arrived at correct answers.

I just need clarification on thest points:

Answer 1

The question says -" fixed overhead budget variance was $2,000 favorable".

How did you assume this as "Fixed overhead expenditure Variance"?

Answer 2

your second forumula is:

= (Standard Hour - Budgeted Hour ) x Budgeted rate per hour

a) How is std hour different from budget hour?

b) you have taken Std hr - budget hr as 48000. But 48000 are the units NOT hrs

you have taken Budget hr as 5 where as it is 2.5 ( $250000/100000 machine hrs)

Thanks.

Manmohan ACA, CS

Chartered Accountant

14243 Points Joined February 2009

Originally posted by : Anil

Thank you sir. You have arrived at correct answers.

I just need clarification on thest points:

Answer 1

The question says -" fixed overhead budget variance was $2,000 favorable".

How did you assume this as "Fixed overhead expenditure Variance"?

Just follow a goof book on standard costing fixed overhead budget variance and "Fixed overhead expenditure Variance are same thing !!

Answer 2

your second forumula is:

= (Standard Hour - Budgeted Hour ) x Budgeted rate per hour

a) How is std hour different from budget hour?

standard rate per unit or budgeted rate per unit is always same , you can take any thing , its is basic thing yaar

=========

b) you have taken Std hr - budget hr as 48000. But 48000 are the units NOT hrs

you have taken Budget hr as 5 where as it is 2.5 ( $250000/100000 machine hrs)

follow unitary method

standard hour to produce 50000 units = $ 250000

standard hour to produce 1 units =$ 250000 / 50000 = $ 5 Hour per unit

standard Hour to produce 48000 units = 48000* 5 = $ 240000

Thanks.