Question

Nathan Publishing Company specializes in printing specialty textbooks for a small but profitable college market. Due to the high setup costs for each batch printed, Jo Nathan holds the book requests until demand for a book is approximately 500. At that point Jo Nathan will schedule the setup and production of the book. For rush orders, Jo Nathan will produce smaller batches for an additional charge of $700 per setup.

Static-budget number of setups, 400.

Budgeted and actual costs for the printing process for 2018 were Static-Budget Amounts Actual Results Number of books produced 200,000 216,000 Average number of books per setup 500 480 Hours to set up printers 6 hours 6.5 hours Variable overhead cost per setup-hour $ 100 $ 90 Total fixed setup overhead costs $72,000 $79,000 Required What is the static-budget number of setups for 2018? What is the flexible-budget number of setups for 2018? What is the actual number of setups in 2018? Assuming fixed setup overhead costs are allocated using setup-hours, what is the predetermined fixed setup overhead allocation rate? Does Jo Nathan’s charge of $700 cover the budgeted variable overhead cost of an order? The budgeted total overhead cost? For variable setup overhead costs, calculate the rate and efficiency variances. For fixed setup overhead costs, calculate the rate and the production-volume variances. What qualitative factors should Jo Nathan consider before accepting or rejecting a special order?

Answer 1

What is the static-budget number of setups for 2018?

1) Static budget number of setups = Budgeted books produced/ Budgeted books per setup= 200000 ÷ 500 = 400 setups

2. Flexible budget number of setups = Actual books produced / Budgeted books per setup= 216000 ÷ 500 = 432 setups .

3. Actual number of setups = Actual books produced / Actual books per setup= 216000/480 = 450  setups

4. Static budget number of hours = Static budget number of setups × Budgeted hours per setup= 400 × 6 = 2400 hours

Fixed overhead rate = Static budget fixed overhead / Static budget number of hours= $72000/2,400 = $30 per hour

5. Budgeted direct variable cost of a setup = Budgeted variable cost per setup-hour × Budgeted number of setup-hours= $100 × 6= $600

Budgeted total cost of a setup = Budgeted direct variable cost + (Fixed overhead rate × Budgeted number of setup-hours)= $600 + ($30 × 6) = $780

So, the charge of $700 covers the budgeted incremental (i.e., variable) cost of a setup but not the budgeted full cost.

6. Direct Variable Variance Analysis for Nathan Publishing Company for 2018:

Actual Variable Cost = 450 * 6.5 * $90 = $ 263250

Actual Hours * Budgeted Rate = 450 * 6.5 * $100 = $ 292500

Standard Hours * Standard Rate = 432 * 6.0 * $100 = 259200.

So, here the Price Variance = Actual Variable Cost - (Actual Hours * Budgeted Rate) = $263250 - $292500 = $29250 F

Effeciency Variance = (Actual Hours * Budgeted Rate) - (Standard Hours * Standard Rate) = $292500 - $259200 = $33300U

7. Fixed Setup Overhead Variance Analysis for Nathan Publishing Company for 2018

Actual Fixed Overhead = $79,000

Static Budget Fixed Overhead = $72000

Standard Hours * Budgeted Rate = 432 * 6.0 * $30 = $77760

Spending Variance = Actual Fixed Overhead - Static Budget Fixed Overhead = $79,000 - $72000 = $7000 U

Production Volume Variance = Static Budget Fixed Overhead - (Standard Hours * Budgeted Rate) = $72000 - $77760 = $5760F