(Appendix 10B)Nova Corporation Produces a Single Product and Uses a Standard

question 1

Essay

(Appendix 10B)Nova Corporation produces a single product and uses a standard cost system to help control costs.Overhead is applied to production on the basis of machine hours.According to the company's flexible budget,the following overhead costs should be incurred at an activity level of 18,000 machine hours (the denominator activity level chosen for the current year):
$$\begin{array} { | l | r | } \hline \text { Variable Overhead Costs } & \$ 45,000 \\\hline \text { Fixed Overhead Costs } & \$ 108,000 \\\hline \text { Total Overhead Costs } & \$ 153,000 \\\hline\end{array}$$
During the current year,the following operating results were recorded:
$\begin{array}{|l|r|}\hline \text { Actual Machine Hours Worked } & 15,000 \\\hline \text { Standard Machine Hours Allowed } & 16,000 \\\hline \text { Actual Variable Overhead Cost Incurred } & \$ 38,000 \\\hline \text { Actual Fixed Overhead Cost Incurred } & \$ 107,100 \\\hline\end{array}$
At the end of the year,the company's Manufacturing Overhead account showed total debits for actual overhead costs of $145,100 and total credits for overhead actually applied of $136,000.The difference ($9,100)represents underapplied overhead,the cause of which management would like to know.
Required:
a)Compute the predetermined overhead rate that would have been used during the year,showing separately the variable and fixed components of the rate.
b)Show how the $136,000 of "Applied Costs" was computed.
c)Analyze the $9,100 underapplied overhead figure in terms of the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.
d)(Appendix 10B)Prepare a journal entry to record the variable overhead costs incurred and applied,including the results of the variance analysis.
e)(Appendix 10B)Prepare a journal entry to record the fixed overhead costs incurred and applied,including the results of the variance analysis.

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Definitions:

Risk-Free Asset

An asset that supposedly carries no risk of financial loss and is expected to return its full value along with known interest or dividends.

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Capital Allocation Line

A graphical representation used in finance to show possible rates of return for portfolios with different levels of risk.

Lending Rate

The interest rate charged by banks on loans extended to clients.