Horak Company produces one product, a putter called GO-Putter. Horak uses a standard cost system and determines that it should take one hour of direct labour to produce one GO-Putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $800,000 comprised of $200,000 of variable costs and $600,000 of fixed costs. Horak applies overhead on the basis of direct labour hours. During the current year, Horak produced 90,000 putters, worked 94,000 direct labour hours, and incurred variable overhead costs of $186,000 and fixed overhead costs of $600,000. Instructions (a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate. (b) Compute the applied overhead for Horak for the year. (c) Compute the total overhead variance.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Horak Company produces one product, a putter called GO-Putter. Horak uses a standard cost system and determines that it should take one hour of direct labour to produce one GO-Putter. The normal production capacity for this putter is 100,000 units per year. The total budgeted overhead at normal capacity is $800,000 comprised of $200,000 of variable costs and $600,000 of fixed costs. Horak applies overhead on the basis of direct labour hours. During the current year, Horak produced 90,000 putters, worked 94,000 direct labour hours, and incurred variable overhead costs of $186,000 and fixed overhead costs of $600,000.
Instructions
(a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate.
(b) Compute the applied overhead for Horak for the year.
(c) Compute the total overhead variance.
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