Question

Sweet Tooth Temptations makes cupcakes in batches. To manufacture a batch of cupcakes, Brenda, the master baker, must setup the measuring and mixing machines. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up measuring and mixing machines for different flavours of cupcakes.

Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup hours. The following information pertains to March.

                                                                                   Static-budget Actual

                                                                                       Amounts     Amounts

Cupcakes produced and sold                                     25,000         28,000

Batch size (number of cupcakes per batch)                   200              224

Setup hours per batch                                                         2.0                1.8

Variable overhead cost per setup hour                           $60              $62

Total fixed setup overhead costs                              $25,500       $30,000

Required:

a.   Calculate the rate and efficiency variances for variable setup overhead costs.

b.   Calculate the rate and production-volume variances for fixed setup overhead costs.

c. Explain the variable overhead efficiency variance. Your explanation should include more than that it was favourable or unfavourable. It should discuss a credible reason as to why.

Answer 1

Answer:

a. Data for Variable overhead variance

Budget (Standard) Revised Budget Actual

(Budget for Actual Output)

	Rate per Setup hour	Total Cost		Rate per Setup hour	Total Cost		Rate per Setup hour	Total Cost
Variable overhead	$ 60	$ 15,000		$ 60	$ 16,800		$ 62	$ 13,950
	(15,000 / 125*2)						(13,950 / 125*1.8)

Variable overhead Rate Variance = ( SR - AR ) * AH

= ( 60 - 62 ) * 225

= ( - 2 ) * 225

= $ 450 U

Where, SR is Standard variable overhead rate per setup hour

AR is Actual variable overhead rate per setup hour

AU are Actual Set up hours

Variable Overhead Efficiency Variance = ( SH - AH ) *SR

= ( 280 - 225 ) * $ 60

= ( 55 ) * $ 60

= $ 3,300 F

Where, SH is standard set up hours allowed for actual output

AH is actual set up hours

SR is standard variable overhead rate per set up hour

Working;

Standard Set up hours allowed for actual output = (Actual output / Standard batch size) * Set up hour per batch

= ( 28,000 / 200 ) * 2 hours

= 280 Hours

Actual Set up hours = Actual Number of batches * Set up hour per batch

= 125 * 1.8

= 225 Hours

Total Budgeted Variable overhead:

= Rate per set up hour * Set up hour per batch * Number of batch

= $ 60 * 2 * 125

= $ 15,000

Budgeted Number of batch = Total Budgeted unit / Budgeted Batch size

= 25,000 / 200

= 125 batches

Budgeted Variable cost per unit = Total Budgeted variable cost / Total Budgeted units

= $ 15,000 / 25,000 units

= $ 0.6

Budgeted Variable cost for Actual output:

= Actual output * Budgeted variable cost per unit

= 28,000 units * $ 0.6

= $ 16,800

Total Actual Variable overhead

= Rate per setup hour * Setup hour per batch * Number of batches

= $ 62 * 1.8 * 125

= $ 13,950

Actual Number of Batches = Total Actual Output / Actual Batch seze

   = 28,000 / 224

= 125 Batches

b.

FIxed Overhead Rate Variance = Budgeted fixed overhead - Actual fixed overhead

= $ 25,500 - $ 30,000

= $ 4,500 U

Fixed Overhead Volume Variance = Applied Fixed overhead - Budgeted Fixed overhead

= $ 28,560 - $ 25,500

= $ 3,060 F

Applied Fixed overhead = Standard fixed overhead rate * Actual units produced

= $ 1.02 * 28,000

= $ 28,560

Standard fixed overhead rate = Budgeted Fixed overhead / Budgeted units

= $ 25,500 / 25,000

= $ 1.02

  

c. Explanation for variable overhead efficiency variance:

Here the variable overhead efficiency variance is favourable.

Reason for Favourable variable overhead efficiency variance:

Favourable Variable Overhead Efficiency variance indicates that Actual set up hours are lower than set up hours allowed for actual output.

The Reasons may include:

• Employed highly skilled labour or Improve the skills of existing labour through training leading to improved productivity.
• Installation of more efficient manufacturing equipement