Skillful Ltd budgeted $900,000 for total overhead. The standard variable overhead rate was $1 per direct labour hour, or $3 per unit, based on an anticipated activity level of 300,000 direct labour hours. During the year 110,000 units were produced. Fixed overhead costs incurred were $590,000. The variable overhead budget variance was $5,500 unfavourable, and the actual variable overhead rate was $1.10 per direct labour hour. The standard fixed overhead rate per direct labour hour was:
A) $1.0
B) $2.00
C) $0.50
D) $5.45

Question

Quizplus · Accepted Answer

The standard fixed overhead rate per direct labour hour is calculated by dividing the total budgeted fixed overhead by the anticipated activity level. The total overhead budget is $900,000, and the variable overhead is $1 per direct labour hour for 300,000 hours, totaling $300,000. Subtracting the variable overhead from the total overhead gives the fixed overhead budget of $600,000 ($900,000 - $300,000). Dividing the fixed overhead budget by the anticipated activity level (300,000 hours) gives a standard fixed overhead rate of $2.00 per direct labour hour.

Skillful Ltd Budgeted $900,000 for Total Overhead