The Standard Combined Variable And Fixed Overhead Applicatio

The standard combined variable and fixed overhead application rate

Alan Collins (V2.1): (Adapted with permission of CMA Canada) Alan Collins is a forensic accountant and has been hired by the Widget Department of the Global Corporation. A disgruntled cost accountant in the administrative area within the Widget Department broke a water main that destroyed certain computer files. Management has been gathering data from whatever source possible. It is hoped that Alan's work can be used as a template for staff in the future. Here is what management has passed on to Alan: Each widget requires a standard direct labor input of 5.75 hours per unit.

Total (combined variable and fixed) overhead is applied to production using a standard (predetermined) amount per direct labor hour. The balance of the Factory Overhead Control Account is written off to Cost of Goods Sold at the end of every month. The following analysis for November and December: . December . . November . Actual total (V & F) overhead $ 658,711 $ 670,600 Standard direct labor hours allowed 22,425 hours 24,150 hours Overhead Variances: Price/spending (V & F) $ 289 Favorable $ 4,400 Favorable Efficiency $ 3,400 Favorable $ 1,200 Favorable Production Volume (denominator) $ 12,075 Unfavorable $ 24,150 Favorable Total Variance $ 8,386 Unfavorable $ 29,750 Favorable The Widget division produced 4,100 units in January, used 24,000 hours at a variable cost of $8.10 per hour, and incurred a total overhead cost of $ 676,900. It is now the beginning of February. Alan has been asked (by management) to prepare an analysis of total overhead costs for January.

Paper For Above instruction

In this report, a comprehensive analysis of the overhead costs for the Widget division for January will be conducted, including determination of the standard overhead rate, its components, and a detailed variance analysis. This will facilitate better understanding and control of manufacturing overhead costs, essential for accurate product costing and management decision-making.

1. The Standard Combined Variable and Fixed Overhead Rate

The standard (predetermined) overhead rate is calculated based on expected overhead costs associated with standard direct labor hours. Given the data, the rate is designed to incorporate both variable and fixed components, applied uniformly per direct labor hour.

From prior data, the total overhead costs and standard direct labor hours are essential for computing this rate. For December, the total overhead was $658,711, and the standard direct labor hours allowed were 22,425 hours. Similarly, for November, total overhead was $670,600, with 24,150 hours allowed. The average of these figures provides a reasonable estimate for the standard overhead rate.

2. The Variable and Fixed Portions of the Predetermined Overhead Rate

The variable portion of the overhead rate is based on the variable overhead cost per direct labor hour, while the fixed portion is allocated based on fixed overhead costs, spread over estimated direct labor hours.

From the provided data, the variable overhead rate per hour can be derived from the variance analysis accumulated in previous months. The variance components demonstrate the behavior of overhead costs relative to standard expectations, enabling us to segregate variable and fixed parts.

3. The Numerator and Denominator Amounts Used in Overhead Rate Calculation

The numerator is the estimated or budgeted total overhead costs for the period, while the denominator is the estimated or standard direct labor hours planned for that period.

In this scenario, the numerator is the budgeted overhead cost (which can be approximated using the sum of actual costs or standard projected costs), and the denominator is the standard hours allowed, such as 22,425 hours for December or 24,150 hours for November. For January, actual and projected figures are considered for accuracy.

4. Analysis of January's Operations

a) The Factory Overhead Control Account Before Adjustment

The account balance before adjustments can be calculated by comparing actual overhead incurred with applied overhead. The actual overhead for January was $676,900, and the applied overhead depends on the predetermined rate applied to actual direct labor hours used, which were 24,000 hours.

b) The Flexible Budget for Overhead in January

The flexible budget is based on actual activity levels; thus, the budgeted overhead at 24,000 hours can be estimated using the standard rate calculated earlier. This provides a benchmark to compare actual overhead costs and evaluate variances.

c) Overhead Variances for January

Variance analysis reveals the differences between actual and budgeted overhead costs, broken down into price/spending and efficiency variances. The total variance indicates whether overhead costs were over- or under-spent, guiding management of cost controls.

Conclusion

Overall, understanding the composition and variances of manufacturing overhead is crucial for effective cost management. Through calculating the standard overhead rate, analyzing variances, and examining actual operational data, the Widget division can improve its budgeting accuracy and cost efficiency, which are vital metrics for long-term profitability and competitiveness.

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