Question

Norther Leasing Corp. has the following standards for one unit of product:

Direct material: 80 pounds X $6	$480
Direct labor: 3 hours X $16 per hour	48
Variable overhead: 1.5 hours of machine time X $50 per hour	75
Fixed overhead: 1.5 hours of machine time X $30 per hour	45

The predetermined OH rates were developed using a practical capacity of 6,000 units per year. Production is assumed to occur evenly throughout the year.

During May 2010, the company produced 525 units. Actual data for May 2010 are as follows:

Direct material purchased: 45,000 pounds X $5.92 per pound

Direct material used: 43,020 pounds (all from May’s purchases)

Total labor cost: $24,955 for 1,550 hour

Variable overhead incurred: $43,750 for 800 hours of machine time

Fixed overhead incurred: $22,800 for 800 hours of machine time

Required: Calculate the following:

a) Variable overhead Cost

b) Variable overhead expenditure variance

c) Variable efficiency variances

d) Fixed overhead cost

e) Fixed overhead expenditure

f) Fixed volume variances

Answer 1

Actual Units produced (actual output) in May = 525 units

a) Standard Variable overhead cost for actual output

= Standard Variable cost per unit * Actual Units Produced

= 75*525 = $ 39375

Variable overhead cost Variance

= Standard Variable overhead cost for actual output – Actual Variable Overhead cost

= 39375 – 43750

= $ 4375 (Unfavourable)

b) Variable Overhead expenditure variance

= (Standard variable overhead rate per hour – Actual variable overhead rate per hour) * Actual machine hours

= (50 – 54.6875) * 800

= $ 3750 (Unfavourable)

Note :

Actual variable overhead rate per hour = Actual variable overhead / Actual machine hours

= 43750/800 = $54.6875

c) Variable Efficiency Variance

= (Standard hours for actual output – Actual hours) * Standard variable overhead rate per hour

= (787.5 – 800) * 50

= $ 625 (Unfavourable)

Note:

Standard hours for actual output = Standard hours per unit * Actual output

= 1.5*525 = 787.5

d) Budgeted production(output) for one month = Budgeted output per year /12 = 6000/12 = 500 units

Budgeted Fixed overhead for the month of May

= Budgeted Fixed overhead per unit * Budgeted output per month

= 45*500 = $ 22500

Absorbed Fixed Overheads = Actual output * Budgeted Fixed overhead per unit

= 525 * 45 = $ 23625

Fixed Overhead cost Variance = Absorbed Fixed Overhead - Actual Fixed Overhead

= 23625 – 22800 = $ 825 (Favourable)

e) Fixed Overhead Expenditure Variance

= Budgeted Fixed overhead - Actual Fixed overhead

= 22500 – 22800 = $ 300 (Unfavourable)

f) Fixed Overhead Expenditure Variance

= Absorbed Fixed Overhead - Budgeted Fixed Overhead

= 23625 – 22500 = $ 1125 (Favourable)