Standard Machine Hours Allowed For Actual Output

Question

Teana Corporation uses machine hours as its denominator activity for fixed manufacturing overhead. For the most recent year, the company showed the following data:

 

At the beginning of the year:
Budgeted Machine Hours(denominator level) : 600,000 Machine Hours

At the end of the year:

Actual Fixed Manufacturing Overhead : $260,000

Fixed Manufacturing Overhead Budget Variance : $20,000 Favorable

Fixed Manufacturing Overhead Volume Variance : $15,000 Favorable

 

Question : Teana's standard machine hours allowed for actual output will be closest to ?

A) 562,500 MH's B) 632,143 MH's C) 637,500 MH's D) 567,857 MH's E) None of above

The answer was B) but I need help with steps as to how any why

Answer 1

To determine Teana Corporation's standard machine hours allowed for actual output, we need to analyze the information given about fixed manufacturing overhead and the variances.

Given Data:

1. Budgeted Machine Hours (Denominator Level): 600,000 MH

2. Actual Fixed Manufacturing Overhead: $260,000

3. Fixed Manufacturing Overhead Budget Variance: $20,000 Favorable

4. Fixed Manufacturing Overhead Volume Variance: $15,000 Favorable

Understanding the Variances:

1. Budget Variance: The fixed manufacturing overhead budget variance indicates the difference between the budgeted fixed manufacturing overhead and the actual fixed manufacturing overhead incurred. A favorable variance means actual costs were lower than budgeted.

- Formula

{Budgeted FOH} - \{Actual FOH} = \{Budget Variance}

Rearranging gives:

{Budgeted FOH} = \{Actual FOH} + \{Budget Variance}

Plugging in the numbers:

{Budgeted FOH} = 260,000 + 20,000 = 280,000

2. Volume Variance: The fixed manufacturing overhead volume variance reflects how much overhead is allocated based on actual machine hours compared to the budgeted machine hours. A favorable volume variance indicates that more units were produced than budgeted.

- Formula:

{(Budgeted Machine Hours - Actual Machine Hours)} \times \{Fixed Overhead Rate} = \{Volume Variance}

Finding the Fixed Overhead Rate:

To find the fixed overhead rate, we use the budgeted fixed manufacturing overhead divided by the budgeted machine hours:

{Fixed Overhead Rate} = \frac{\{Budgeted FOH}}{\{Budgeted Machine Hours}} = \frac{280,000}{600,000} = \frac{280}{600} = 0.4667 \{ (rounded)}

Determining the Standard Machine Hours Allowed for Actual Output:

Using the volume variance to find the actual machine hours:

Volume Variance} = \{Fixed Overhead Rate} \times (\{Budgeted Machine Hours} - \{Standard Machine Hours Allowed})

Rearranging gives:

{Standard Machine Hours Allowed} = \{Budgeted Machine Hours} - \left(\frac{\{Volume Variance}}{\{Fixed Overhead Rate}}\right)

Substituting the values:

{Standard Machine Hours Allowed} = 600,000 - \left(\frac{15,000}{0.4667}\right)

Calculating: {Amount} = \frac{15,000}{0.4667} \approx 32,143 \{ MH}

Finally:{Standard Machine Hours Allowed} \approx 600,000 - 32,143 \approx 567,857 \{ MH}

So the closest answer is D) 567,857 MH's.