Question

Tiger Equipment Inc., a manufacturer of construction equipment, prepared the following factory overhead cost budget for the Welding Department for May of the current year. The company expected to operate the department at 100% of normal capacity of 8,400 hours.

1	Variable costs:
2	Indirect factory wages	$30,240.00
3	Power and light	20,160.00
4	Indirect materials	16,800.00
5	Total variable cost		$67,200.00
6	Fixed costs:
7	Supervisory salaries	$20,000.00
8	Depreciation of plant and equipment	36,200.00
9	Insurance and property taxes	15,200.00
10	Total fixed cost		71,400.00
11	Total factory overhead cost		$138,600.00

During May, the department operated at 8,860 hours, and the factory overhead costs incurred were indirect factory wages, $32,400; power and light, $21,000; indirect materials, $18,250; supervisory salaries, $20,000; depreciation of plant and equipment, $36,200; and insurance and property taxes, $15,200.

Required:

Prepare a factory overhead cost variance report for May. To be useful for cost control, the budgeted amounts should be based on 8,860 hours. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Answer 1

• All working forms part of the answer
• Unfavourable Variance   = When Actual cost are MORE than Flexible Budgeted Cost
• Favourable variance = When Actual Costs are LESS than Flexible Budgeted Cost
• Calculation for variable cost per hour to calculate variable cost for 8860 hours

1	Variable costs:	Total at 8400 hours	Hours	Variable cost per hours
2	Indirect factory wages	$           30,240.00	8400	$                   3.60
3	Power and light	$           20,160.00	8400	$                   2.40
4	Indirect materials	$           16,800.00	8400	$                   2.00
5	Total variable cost	$           67,200.00	8400	$                   8.00

• Budget and Variances, as asked

1	Variable costs:	Flexible Budget For 8860 hours	Actual Result for 8860 Hours	Variance
2	Indirect factory wages	$          31,896.00	$         32,400.00	$        504.00	Unfavourable
3	Power and light	$          21,264.00	$         21,000.00	$     (264.00)	Favourable
4	Indirect materials	$          17,720.00	$         18,250.00	$        530.00	Unfavourable
5	Total variable cost	$          70,880.00	$         71,650.00	$        770.00	Unfavourable
6	Fixed costs:			$                 -
7	Supervisory salaries	$          20,000.00	$         20,000.00	$                 -
8	Depreciation of plant and equipment	$          36,200.00	$         36,200.00	$                 -
9	Insurance and property taxes	$          15,200.00	$         15,200.00	$                 -
10	Total fixed cost	$          71,400.00	$         71,400.00	$                 -
11	Total factory overhead cost	$       1,42,280.00	$      1,43,050.00	$        770.00	Unfavourable