Question

Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.

One such non-custom model is called Luxury Base Frame. Normal production is 1,140 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 1,030 units were produced; 5,100 direct labor hours were allowed for standard production, but only 4,600 hours were used. Standard and actual overhead costs were as follows.

		Standard (1,140 units)			Actual (1,030 units)
Indirect materials		$  13,900			$  14,300
Indirect labor		50,000			59,300
(Fixed) Manufacturing supervisors salaries		26,200			25,600
(Fixed) Manufacturing office employees salaries		15,100			14,500
(Fixed) Engineering costs		31,400			29,100
Computer costs		11,600			11,600
Electricity		2,900			2,900
(Fixed) Manufacturing building depreciation		9,300			9,300
(Fixed) Machinery depreciation		3,500			3,500
(Fixed) Trucks and forklift depreciation		1,700			1,700
Small tools		810			1,630
(Fixed) Insurance		580			580
(Fixed) Property taxes		350			350
Total		$167,340			$174,360

Calculate the total overhead variance, controllable variance, and volume variance. (Round variable overhead to 2 decimal places and final answers to 0 decimal places, e.g. 1,575.)

Answer 1

Solution :-

Particulars	Amount
Overhead applications rate	= $167,340 / [ 1,140 units * 5 hours ] = $167,340 / 5,700 = $29.36
Applied overhead	= 5,100 direct labor hours * $29.36 = $149,725
Total overhead variance	= $149,725 - $174,360 = ( $24,635 ) ( unfavorable)
Total budgeted variance overhead	=  13,900 + 50,000 + 11,600 + 2,900 + 810 = $79,210
Variance overhead rate per hour	= $79,210 / [  1,140 units * 5 hours ] =  $79,210 / 5,700 = $14
Budgeted fixed overhead	= $167,340 -  $79,210 = $88,130
Budgeted overhead for actual production	= [ 5,100 * $14 ] + $88,130 = $71,400 + $88,130 = $159,530
Actual overhead incurred	$174,360
Controllable variance	=  $159,530 - $174,360 = ( $14,830 ) ( unfavorable)
Volume variance	= $149,725 - $159,530 = ( $9,805 ) ( unfavorable)