# Baird Company makes classic Polish sausage. The company uses a standard cost system to help control costs.

## Question:

Baird Company makes classic Polish sausage. The company uses a standard cost system to help control costs. Manufacturing overhead is applied to production on the basis of standard direct labor-hours. According to the company’s planning budget, the following manufacturing overhead costs should be incurred at an activity level of 35,000 labor-hours (the denominator activity level):

Variable manufacturing overhead cost . . . . . . . $87,500 Fixed manufacturing overhead cost . . . . . . . . . 210,000 Total manufacturing overhead cost . . . . . . . . .$297,500

During the most recent year, the following operating results were recorded:

Activity:

Actual labor-hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Standard labor-hours allowed for the actual output . . . . . . .  32,000
Cost:
Actual variable manufacturing overhead cost incurred . . . . $78,000 Actual fixed manufacturing overhead cost incurred . . . . .$209,400

At the end of the year, the company’s Manufacturing Overhead account contained the following data:

Management would like to determine the cause of the $15,400 underapplied overhead. Required: 1. Compute the predetermined overhead rate. Break the rate down into variable and fixed cost elements. 2. Show how the$272,000 Applied figure in the Manufacturing Overhead account was computed.

3. Breakdown the \$15,400 underapplied overhead into four components: (1) variable overhead rate variance, (2) variable overhead efficiency variance, (3) fixed overhead budget variance, and (4) fixed overhead volume variance.

4. Explain the meaning of each variance that you computed in (3) above.

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