Question

Using the following budget data for Valley Corporation, which produces only one product, calculate the company’s predetermined manufacturing overhead application rate for variable overhead. Hint: The factory supervisor’s salary is direct labor, since it is incurred regardless of production. SG&A expenses relate to the entire operations of Valley Corporation and not just related to manufacturing.

Units to be produced	11,000
Units to be sold	10,000
Indirect materials, varying with production	$1,000
Indirect labor, varying with production	10,000
Factory supervisor’s salary, incurred regardless of production	20,000
Depreciation on factory building and equipment	30,000
Utilities to operate factory machines	12,000
Security lighting for factory	2,000
Selling, general and administrative (SG&A) expenses	5,000

Answer 1

Variable overhead consists of those inputs to the production process that (1) vary with the level of production and (2) cannot be practicably traced to end products . In Valley’s case, these include indirect materials ($1,000),indirect labor ($10,000), and utilities ($12,000), for a total of $23,000. Dividing this amount by the number of units scheduled for production yields a variable overhead application rate of =$2.09 ($23,000 ÷ 11,000).