Question

The Jones Corporation uses standard costing in its manufacturing plant for auto parts. The standard cost of a particular auto​ part, based on a denominator level of 3,600 output units per​ year, included 5 ​machine-hours of variable manufacturing overhead at $ 7 per hour and 5 ​machine-hours of fixed manufacturing overhead at $ 15 per hour. Actual output produced was 4,100 units. Variable manufacturing overhead incurred was $235,000. Fixed manufacturing overhead incurred was $385,000. Actual​ machine-hours were 27,500.

1.	Prepare an analysis of all variable manufacturing overhead and fixed manufacturing overhead​ variances, using the​ 4-variance analysis.
2.	Prepare journal entries using the​ 4-variance analysis.
3.	Describe how individual fixed manufacturing overhead items are controlled from day to day.
4.	Discuss possible causes of the fixed manufacturing overhead variances.

Answer 1

1.  

Variable Manufacturing Overhead Variance Analysis
Actual Costs Incurred           Actual Input Quantity × Actual Rate (1)	Actual Input Quantity × Budgeted Rate (2)	Flexible Budget: Budgeted Input Quantity Allowed for Actual Output × Budgeted Rate (3)
(27500 × $8.54)	(27500 × $7)	(3600*5*$7)
$235,000	$192,500	$126,000
Spending Variance (1-2)	$42,500 U
Efficiency Variance (2-3)	$66,500 U
Flexible Budget Variance	Spending variance - Efficiency variance
	$24,000 U
Fixed manufacturing overhead variance analysis .
1.       Budgeted standard direct manufacturing labor used = 5hrs per unit
2.       Budgeted output = 3,600 units
3.       Budgeted standard direct manufacturing labor-hours = 3,600 × 5 = 18,000 hours
4.       Budgeted fixed manufacturing overhead costs = 18,000 × $15 per hour = $270,000
5.       Actual output = 4,100 units
Allocated fixed manufacturing overhead = 27,500 × $14 = $385000
Actual Costs Incurred           Actual Input Quantity × Actual Rate (1)	Actual Input Quantity × Budgeted Rate (2)	Flexible Budget: Budgeted Input Quantity Allowed for Actual Output × Budgeted Rate (3)
(27500 × $14)	(27500 × $15)	(3600*5*$15)
$385,000	$412,500	$270,000
Spending Variance (1-3)	$27,500 U
Production volume variance (2-3)	$142,500 F
Flexible Budget Variance	$115,000 U

2.

Journal Entries for Variable Overhead Costs and Variances

1. Variable Overhead Control                                    $235,000

Accounts Payable and various other accounts                                   $235,000

To record actual variable overhead costs incurred.

2. Work-in-Process Control                            $126,000

Variable Overhead Allocated                                                 $126,000

To record variable overhead cost allocated

(5 machine-hour/unit 3600 units $7/machine-hour). (The

costs accumulated in Work-in-Process Control are transferred to

Finished Goods Control when production is completed and to Cost of

Goods Sold when the products are sold.)

* *

3. Variable Overhead Allocated                                 $126,000

Variable Overhead Efficiency Variance                     $66,500

Variable Overhead Spending Variance                      $42,500

Variable Overhead Control                                                    $235,500

To record variances for the accounting period.

Journal Entries for Fixed Overhead Costs and Variances

1. Fixed Overhead Control                                                              $385,000

Salaries Payable, Accumulated Depreciation, and various other accounts                                  $385,000

To record actual fixed overhead costs incurred.

2. Work-in-Process Control                                                                $270,000

Fixed Overhead Allocated                                                                                                                      $270,000

To record fixed overhead costs allocated

(5 machine-hour/unit 3,600 units $15/machine-hour).

(The costs accumulated in Work-in-Process Control are transferred to

Finished Goods Control when production is completed and to Cost of

Goods Sold when the products are sold.)

* *

3. Fixed Overhead Allocated                                              270,000

Fixed Overhead Production-Volume Variance              142,500

Fixed Overhead Spending Variance                                                                         27,500

Fixed Overhead Control                                                                                           385,000

To record variances for the accounting period

3)

Individual fixed manufacturing overhead products are not typically affected by day-to-day power. Instead, they are monitored regularly by planning decisions and budgeting procedures. In the following ways individual fixed manufacturing overhead products are managed from day-to-day: (1) By using the fixed salary workforce efficiently and effectively.

(2) By allowing use of resources efficiently by switching off facilities when it is not necessary.

(3) By increasing productivity and production.

4) The fixed overhead spending variance is caused by the actual realization of fixed costs differing from the budgeted amounts.

The net variation in fixed overhead spending is induced by the actual realization of fixed costs, which vary from the sums budgeted.

Such fixed costs are recognized because they are contractually defined, such as rent or insurance, but the fixed sum may change if the rental or insurance contract expires during the year. Estimates of other fixed costs, such as the cost of managerial salaries, the expense of administrative pay rates which may rely upon rewards and different instalment not known toward the start of the period.

Following are some causes for fixed overhead variances:

By Inaccurate planning at the start of the period.

Increase in one or more overhead expenses during the period.

Wastage and inefficiencies in the management of fixed overhead.