Question

Carol’s Dress Shop produces high quality formal dresses. In January 2019 they produced 17,000 dresses. For the month of January, the following standard and actual cost data are available. The normal monthly capacity of the company is 30,000 direct labor hours. All material purchased in January was used in January production.

	Standard per Dress	Actual
Direct materials	5.0 yards @ $8.00 per yard	$660,000 for 80,000 yards
Direct labor	1.5 hours @ $15.00 per hour	$384,000 for 24,000 hours
Overhead	hours @ $5.50 per hour (fixed $3.40; variable $2.10)	$110,000 fixed overhead $52,000 variable overhead

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs are $102,000 per month and budgeted variable overhead costs are $63,000 per month.

Required

1. Calculate the variable overhead spending variance for January. Label the variance as favorable or unfavorable.
2. Calculate the variable overhead efficiency variance for January. Label the variance as favorable or unfavorable.
3. Calculate the fixed overhead spending variance for January. Label the variance as favorable or unfavorable.
4. Calculate the fixed overhead production volume variance for January. Label the variance as favorable or unfavorable.
5. Which of the variances should be investigated if management considers a variance of more than 5% from standard to be significant?
6. Provide a discussion of the tradeoffs that are most likely to exist between the direct material and direct labor variances.

Answer 1

				% from standard
1]	Variable overhead spending variance = Actual variable overhead-Standard VOH rate*Actual hours = 52000-24000*2.1 =	$          1,600	Unfavoarble	3.17%
2]	Variable overhead efficiency variance = Standard variable overhead rate*(Actual hours-Standard hours) = 2.10*(24000-17000*1.50) =	$          3,150	Favorable	12.35%
3]	Fixed overhead spending variance = Actual fixed overhead-Budgeted fixed overhead = 110000-102000 =	$          8,000	Unfavoarble	7.84%
4]	Fixed overhead volume variance = Budgeted fixed overhead-Fixed overhead assigned = 102000-17000*1.5*3.4 =	$        15,300	Unfavoarble	15.00%
5]	Variable overhead efficiency variance the two fixed overhead variances should be investigated.
6]	The direct material price variance and the direct labor efficiency variance are interrelated and subject to tradeoff.
	Cheap material of lower quality will yield a favorable direct material price variance but an unfavorable labor efficiency variance. These two can be traded off-cheaper material for longer hours of work.
	Another possibility is a favorable labour efficiency variance [because of cheap labor] offset by unfavorable direct material quantity variance.