Everett, Inc. budgeted $1,488,000 for total overhead. The standard variable overhead rate was $2 per direct labour hour, or $6 per unit, based on an anticipated activity level of 600,000 direct labour hours. During the year 220,000 units were produced. Fixed overhead costs incurred were $300,000. The variable overhead budget variance was $19,800 unfavourable, and the actual variable overhead rate was $2.10 per direct labour hour.
The fixed overhead allocated was:
A) $300,000
B) $316,800
C) $288,000
D) $330,000

Question

Quizplus · Accepted Answer

To calculate the fixed overhead allocated, we need to first calculate the total overhead applied.

Total overhead applied = (actual direct labour hours x standard variable overhead rate) + fixed overhead costs incurred 
Total overhead applied = (220,000 units x 3 DLH per unit x $2 per DLH) + $300,000 
Total overhead applied = $1,320,000 + $300,000 
Total overhead applied = $1,620,000

Next, we need to determine the variable overhead spending variance:

Variable overhead spending variance = (actual variable overhead rate - standard variable overhead rate) x actual direct labour hours 
Variable overhead spending variance = ($2.10 per DLH - $2 per DLH) x 220,000 DLH 
Variable overhead spending variance = $0.10 per DLH x 220,000 DLH 
Variable overhead spending variance = $22,000 unfavourable

Using the equation:

Total overhead = Variable overhead + Fixed overhead

And substituting in the values from the problem:

$1,620,000 = Variable overhead + $300,000

Variable overhead = $1,320,000

We can solve for the actual variable overhead rate:

Actual variable overhead rate = Actual variable overhead / Actual direct labour hours 
$1,320,000 / 600,000 DLH = $2.20 per DLH

To find the variable overhead efficiency variance:

Variable overhead efficiency variance = (actual direct labour hours - standard direct labour hours) x standard variable overhead rate 
Variable overhead efficiency variance = (220,000 DLH - 600,000 DLH) x $2 per DLH 
Variable overhead efficiency variance = $-760,000 unfavourable

To check our work:

Variable overhead spending variance + Variable overhead efficiency variance = Total variable overhead variance 
$22,000 unfavourable + $-760,000 unfavourable = $-738,000 unfavourable

Total overhead variance = Total overhead applied - Total overhead actual 
Total overhead variance = $1,620,000 - $1,488,000 
Total overhead variance = $132,000 unfavourable

Now that we have all the variances and the actual variable overhead rate, we can determine the fixed overhead allocated:

Fixed overhead allocated = Total overhead applied - Variable overhead actual 
Fixed overhead allocated = $1,620,000 - $1,320,000 
Fixed overhead allocated = $300,000

Therefore, the correct answer is B) $316,800.