Question

1.   Clean Water manufactures a water filter system. The cost standards developed by Clean Water appear below. Manufacturing overhead at Clean Water is applied to production based on standard direct labor-hours:

		Standard quantity per system	Standard cost per Kilogram or hour		Standard cost per system
	Direct materials	4 Kilograms	$3.25		$13.00
	Direct labor	1.4 hours	$11.00		15.40
	Variable overhead	1.4 hours	$4.00		5.60
	Fixed overhead	1.4 hours	$6.00		8.40
	Total standard cost per sucker				$42.40
The standards above were based on an expected annual volume of 8,000 systems Actual results for last year were as follows:
	Number of systems produced			8,200
	Direct labor-hours incurred			11,610
	Kilograms of direct materials purchased			38,300
	Kilograms of direct materials used in production			35,260
	Total cost of direct materials purchased			$126,390
	Total direct labor cost			$131,040
	Total variable overhead cost			$44,900
	Total fixed overhead cost			$67,080

Required:

Compute the following variances for Clear Water and comment on results.

           

A. Variable overhead efficiency variance.

B.Fixed overhead budget variance.

            C.Fixed overheard volume variance

Answer 1

Answer:

A. Variable overhead efficiency variance:

     Standard rate = $4 per hour

     Standard hours for actual production (Working note 1)= 11,480 hours

     Actual hours worked = 11,610 hours

     Variable overhead efficiency variance =

      Standard rate x (Standard hours for actual production – Actual hours worked)

      = $4 x (11,480 hours – 11,610 hours)

      = $4 x (130) hours = $520 (Adverse/ unfavorable)

B. Fixed overhead budget variance:

     Budgeted fixed overheads (Working note 2) = $67,200

     Actual fixed overheads = $67,080

     Fixed overhead budget variance = Budgeted fixed overheads - Actual fixed overheads

     = $67,200 - $67,080 = $120 (Favorable)

C. Fixed overhead volume variance:

    Budgeted fixed overheads (Working note 2) = $67,200

    Absorbed fixed overheads (Working note 3) = $68,880

    Fixed overhead volume variance = Absorbed fixed overheads - Budgeted fixed overheads

= $68,880 - $67,200 = $1,680 (Favorable)

Working Notes:

1. Standard hours for actual production:

Standard hours for production of one system= 1.4 hours

Actual production = 8,200 systems

Standard hours for actual production = 8,200 x 1.4 hours = 11,480 hours

2. Budgeted fixed overheads =

Standard rate of fixed overheads for production of one system= $8.40 per system

Standard production = 8,000 systems

Budgeted fixed overheads = 8,000 x $8.40 = $67,200

                                                                                                           

3. Absorbed fixed overheads =

Standard rate of overhead for production of one system= $8.40 per system

Actual production = 8,200 systems

Absorbed fixed overheads = 8,200 x $8.40 = $68,880