Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 26

Shady Tree produces two products: M1 and M2. There are no beginning inventories or ending work- in-process inventories of either M1 or M2. A single plantwide overhead rate is used to allocate overhead to products using standard direct labor hours. This overhead rate is set at the beginning of the year based on the following flexible budget: Fixed factory overhead is forecast to be $3 million and variable overhead is projected to be $20 per direct labor hour. Management expects plant volume to be 200,000 standard direct labor hours. Here are the standard direct labor hours for each product:

The efficiency and spending overhead variances for the year were zero. The following table summarizes operations for the year.

Required:
a. Calculate the plantwide overhead rate computed at the beginning of the year.
b. Calculate the volume variance for the year.
c. What is the dollar impact on accounting earnings if the volume variance is written off to cost of goods sold
d. What is the dollar impact on accounting earnings of prorating the volume variance to inventories and cost of goods sold compared with writing it off to cost of sales