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

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, we divide the estimated total manufacturing overhead costs by the estimated level of activity, which is usually direct labor-hours.

The standard cost card states that 3.0 DLHs are required per unit of product, so the estimated level of activity for 3,000 units is:

3.0 DLHs/unit x 3,000 units = 9,000 DLHs

However, the company actually used 8,700 DLHs in January. This means that the predetermined overhead rate was based on an estimated level of activity of:

9,000 DLHs - 875 favorable volume variance = 8,125 DLHs

To find the denominator level of activity used in setting the predetermined overhead rate, we need to add the estimated volume variance to the actual DLHs used:

8,700 DLHs + 875 favorable volume variance = 9,575 DLHs

Therefore, the best choice is C) 8,750 DLHs.

The Claus Corporation Makes and Sells a Single Product and Uses