The Claus Corporation makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following:

Variable factory overhead: 3.0 DLHs @ $4.00 per DLH.
Fixed factory overhead: 3.0 DLHs @ $3.50 per DLH.

For January, the company incurred $22,000 of actual fixed manufacturing overhead costs and recorded a $875 favorable volume variance.

-The denominator level of activity in direct labor-hours (DLHs) used by Claus in setting the predetermined overhead rate for January is:
A)9,500 DLHs
B)9,250 DLHs
C)8,750 DLHs
D)10,500 DLHs

Question

The Claus Corporation makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following:

Variable factory overhead: 3.0 DLHs @ $4.00 per DLH.
Fixed factory overhead: 3.0 DLHs @ $3.50 per DLH.

For January, the company incurred $22,000 of actual fixed manufacturing overhead costs and recorded a $875 favorable volume variance.

-The denominator level of activity in direct labor-hours (DLHs) used by Claus in setting the predetermined overhead rate for January is:
A)9,500 DLHs
B)9,250 DLHs
C)8,750 DLHs
D)10,500 DLHs

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, Claus used the estimated overhead costs for the year and estimated activity level in DLHs. In this case, the estimated overhead costs are $120,000 and the estimated activity level is 8,750 DLHs. So, the predetermined overhead rate is:
Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Activity Level
Predetermined Overhead Rate = $120,000 / 8,750 DLHs
Predetermined Overhead Rate = $13.71 per DLH
Therefore, the denominator level of activity in DLHs used by Claus is 8,750 DLHs. Hence, the correct answer is C.

The Claus Corporation Makes and Sells a Single Product and Uses