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 1,000 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 900
units were produced; 4,500 direct labor hours were allowed for
standard production, but only 4,000 hours were used. Standard and
actual overhead costs were as follows.
Standard (1,000 units) |
Actual (900 units) |
||||||
Indirect materials | $ 12,000 | $ 12,300 | |||||
Indirect labor | 43,000 | 51,000 | |||||
(Fixed) Manufacturing supervisors salaries | 22,500 | 22,000 | |||||
(Fixed) Manufacturing office employees salaries | 13,000 | 12,500 | |||||
(Fixed) Engineering costs | 27,000 | 25,000 | |||||
Computer costs | 10,000 | 10,000 | |||||
Electricity | 2,500 | 2,500 | |||||
(Fixed) Manufacturing building depreciation | 8,000 | 8,000 | |||||
(Fixed) Machinery depreciation | 3,000 | 3,000 | |||||
(Fixed) Trucks and forklift depreciation | 1,500 | 1,500 | |||||
Small tools | 700 | 1,400 | |||||
(Fixed) Insurance | 500 | 500 | |||||
(Fixed) Property taxes | 300 | 300 | |||||
Total | $144,000 | $150,000 |
(e)
Discuss causes of the overhead variances. What can management do to
improve its performance next month?
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Controllable overhead variance is caused by using more indirect labor hours (in this case) than expected or by spending more than expected per labor hours.
Volume variance is caused by not utilizing all the available capacity.
To improve performance, management must use indirect labors more efficiently, increase production to 1,000 units and must spend less on overheads.
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