Question

Norwall Company’s budgeted variable manufacturing overhead cost is $1.20 per machine-hour and its budgeted fixed manufacturing overhead is $105,966 per month.

The following information is available for a recent month:

The denominator activity of 33,640 machine-hours is used to compute the predetermined overhead rate.

At a denominator activity of 33,640 machine-hours, the company should produce 11,600 units of product.

The company’s actual operating results were:

Number of units produced		12,060
Actual machine-hours		35,050
Actual variable manufacturing overhead cost	$	38,555
Actual fixed manufacturing overhead cost	$	105,000

Required:

1. Compute the predetermined overhead rate and break it down into variable and fixed cost elements. (Round your answers to 2 decimal places.)

2. Compute the standard hours allowed for the actual production.

3. Compute the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

1. Predetermined Overhead rate = Total Overhead / Total machine hours

Total variable overhead = $1.20 per machine hours x 33640 machine hours = $40,368

Total fixed manufacturing overhead = $105,966

Total Overhead (fixed and variable) = 40368 + 105966 = $146,334

Predetermined Rate = $146,334 / 33640 machine hours = $4.35 per machine hours

Variable element = $1.20 per unit
Fixed Element = $3.15 per unit [4.35 – 1.20]

2. Standard hour for 1 unit of production = 33640 hours / 11600 units = 2.90 machine hours per unit.

Standard hours for actual 12060 units = 12060 x 2.90 machine hours per unit = 34,974 machine hours

3. Variable Rate Variance = (Standard rate – Actual Rate) x Actual hours

= (1.20- 38555/35050) x 35050 = 3,505 Favourable

Variable Efficiency Variance = (Standard hours – Actual hours) x Standard rate per hour
= (34,974 – 35050) x $1.20 = 91.20 Unfavourable

Fixed Budget Variance = Budgeted overhead – Actual Overhead
= $105,966 – 105000 = 966 Favourable

Fixed Volume variance = Standard fixed overhead for actual production – Budgeted Fixed Overhead
= 110,407.50^* – 105,966 = $4,441.50 Favourable

^*$3.15 per machine hours x 35050 machine hours = 110,407.50