CMA 1294 3.28

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  • #230814
    Anatoly Dolinin
    Participant

    Hello!

    In this question is like 2 standard VOH rates/hour: first 8$ (bold text below) and than 9$ (in information of November). What is the difference? Why I can’t use 9$ in calculations?

    Water Control Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are as follows:

    Variable overhead (4 hours at $8/hour) – $32

    The following additional information is available for the month of November:

    ….
    The standard direct labor rate is $9 per hour.

     

    Best regards,

    Anatoly Dolinin

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  • #230821
    Lynn Roden
    HOCK international

    Hello Anatoly Dolinin,

    We have two different costs here.

    Variable overhead is applied on the basis of direct labor hours, and the standard cost per direct labor hour of $8 is the variable overhead application rate. It is not the direct labor wage rate. Direct labor hours is merely the basis on which the variable overhead is applied.

    The $9 per hour is the standard direct labor (wage) rate. If you were calculating a direct labor variance, you would use the standard and actual direct labor rates. The actual direct labor rate was $10 per hour ($940,000 actual cost / 94,000 direct labor hours actually worked); and the standard direct labor rate is given as $9 per hour. But those wage rates per hour are not used when calculating overhead variances.

    The actual direct labor hours used and the standard direct labor hours allowed for the actual output are used when calculating the variable overhead variances, though, because direct labor hours is what the variable overhead application is based on.

    Lynn

    #230960
    Anatoly Dolinin
    Participant

    Thanks for the clarification!

     

    Best regards,

    Anatoly Dolinin

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