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    Highland Shortbread: Compute the predetermined overhead rate of the year

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    Highland Shortbread produces a single product and uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard machine hours. According to the company's flexible budget, the following overhead costs should be incurred at an activity level of 18,000 machine hours (the denominator activity level chosen for the year).
    Variable manufacturing overhead cost 31,500
    Fixed Manufacturing overhead cost 72,000
    Total Manufacturing overhead cost 103,500

    During the year, the following operating results were recorded:
    Actual machine hours worked 15,000
    Standard machine hours allowed 16,000
    Actual variable manufacturing overhead cost incurred 26,500
    Actual fixed manufacturing overhead cost incurred 70,000
    At the end of the year, the company's Manufacturing Overhead account contained the following data:
    Manufacturing Overhead
    Actual Cost 96,500 Applied Costs 92,000
    Management would like to determine the cause of the 4,500 under applied overhead.
    1) Compute the predetermined overhead rate of the year. Break it down into variable and fixed cost elements.
    2) Show the 92,000 "applied costs" figure in the Manufacturing Overhead account was computed.
    3) Analyze the 4,500 under applied overhead figure in terms of the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.
    4) Explain the meaning of each variance that was computed in (3) above.

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    Solution Summary

    The expert computes the predetermined overhead rate of the year for Highland Shortbread.