Question

Munoz, Inc., produces a special line of plastic toy racing cars. Munoz, Inc., produces the cars in batches. To manufacture a batch of the cars, Munoz, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of cars.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:

	Actual Amounts	Static-budget Amounts
Units produced and sold	15,000	11,250
Batch size (number of units per batch)	250	200
Setup-hours per batch	5	5.25
Variable overhead cost per setup-hour	$40	$38
Total fixed setup overhead costs	$12,000	$9,975

1) Using the ABC Variance Problem with Nunez Company, what is the variable overhead spending variance? State if it is favorable (FA) or unfavorable (UN)?

2) Using the ABC Variance Problem with Nunez Company. What is the variable overhead efficiency variance? State if it is favorable (FA) or unfavorable (UN)?

Answer 1

1) Calculation of Variable Overhead Spending Variance.

Actual Number of Batches = Units Produced / Batch Size

= 15,000 units / 250 units per batch

= 60 Batches

Total Variable Setup Cost:

Actual Production = Number of batches * Actual hour per batch * Rate per batch

= 60 batch * 5 hours per batch * $40

= $12,000

Badgeted Setup Cost For Actual Production

= Units Produced / Batch Size * Standard hours per batch * Standard rate per batch

= 15,000 units / 200 per batch * 5.25 hours * $38

= $14,962.5

Spending Variance = Actual Variance Setup Cost - Budgeted Setup Cost

= $12,000 - $14,962.5

= $2,962.5 (favorable)

2) Variable Overhead Efficiency Variance

= (Standard Hours * Standard Variable Overhead Rate Per Hour) - (Actual Hours * Standard Variable Rate Per Hour)

= (60 batches * 5.25 hour per batch * $38) - (60 batches * 5 hours per batch * $38)

= $11,970 - $11,400

= $570 (Favourable)