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# Overhead rate and variances

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Ed Widner and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.

One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

Standard (1,000 units) Actual (900 units)
Indirect materials \$ 12,000 \$ 12,300
Indirect labor 43,000 51,000
(Fixed) Manufacturing supervisors salaries 22,000 22,000
(Fixed) Manufacturing office employees salaries 13,000 11,500
(Fixed) Engineering costs 27,000 25,000
Computer costs 10,000 10,000
Electricity 2,500 2,500
(Fixed) Manufacturing building depreciation 8,000 8,000
(Fixed) Machinery depreciation 3,000 3,000
(Fixed) Trucks and forklift depreciation 1,500 1,500
Small tools 700 1,400
(Fixed) Insurance 500 500
(Fixed) Property taxes 300 300
Total \$143,500 \$149,000

Instructions

(a) Determine the overhead application rate.

(b) Determine how much overhead was applied to production.

(c) Calculate the total overhead variance, controllable variance, and volume variance.

(d) Decide which overhead variances should be investigated.

(e) Discuss causes of the overhead variances. What can management do to improve its performance next month?

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#### Solution Summary

The solution explains how to calculate the overhead application rate and the overhead variances

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## Computing overhead rate, variances and cost of goods sold

Athens Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of machine hours. The company's accountant estimated that overhead and machine hours would total \$800,000 and 50,000, respectively, for 20x1. Actual costs incurred follow.

The manufacturing overhead figure presented above excludes \$27,000 of sales commissions incurred by the firm. An examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of \$2,960,000. These goods were sold to customers for \$3,720,000. Actual machine hours worked totaled 51,500, and Athens adjusts under- or overapplied overhead at year-end to Cost of Goods Sold.

Required:

A. Determine the company's predetermined overhead application rate.
B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead was under- or overapplied.
C. Compute the company's cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for under- or overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?

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