Question

Horngren's accounting 12 edition, Chapter 23 Problem 21

Calculating overhead variances

MILLS ALLOCATES MANUFACTURING OVERHEAD TO PRODUCTION BASED ON STANDARD DIRECT LABOR HOURS. MILLS REPORTED THE FOLLOWING ACTUAL RESULTS FOR 2018:

ACTUAL NUMBER OF UNITS PRODUCED: 1,000

ACTUAL VARIABLE OVERHEAD: $4000

ACTUAL FIXED OVERHEAD: $3,100

ACTUAL DIRECT LABOR HOURS: 1,600

Note: 1. VOH Coat Var. $1,600U

Info from E23-18  

Murr, Inc. produced 1,000 units of the company's product in 2018, The standard quantity of direct materials was three yards of cloth per unit at a standard cost of $1.35 per yard. The accounting records showed that 2,500 yards of cloth were used and the company paid $1.40 per yard. Standard time was two direct labor hours per unit at a standard rate of$10.00 per direct labor hour. Employees worked 1,700 hours and were paid $9.50 per hour

Mills Inc. Is a competitor of murry, Inc. from exercise E23-18. Mills also uses a standard cost system and provides the following info.

Static budget variable overhead	$1,200
Static budget fixed overhead	$1,600
Static budget direct labor hours	800 hours
Static budget number of units	400 units
Standard direct labor hours	2 hours per unit

Figure out and analyze: The requirements

1. Compute the variable overhead cost and efficiency variances and fixed overhead cost and volume variances.

2. EXPLAIN (as best you can) why the variances are favorable or unfavorable. Based on cost and efficiency budget standards.

Solutions should look something like this:

Standard VOH	= Budgeted VOH
allocation rate	Budgeted allocation base
	=(answer)
	(answer)
	(answer)

Standard FOH	= budgeted FOH
allocation rate	Budgeted allocation base
	= (answer)
	(answer)
	= (answer)

VOH Cost variance

VOH Cost variance	=Actual VOH - (SC * AQ)
	(answer)
	(answer)

VOH efficiency variance

VOH Efficiency Variance	= (AQ-SQ) * SC
	(answer)
	(answer)

FOH Cost Variance

FOH Cost Variance	=Actual FOH-Budgeted FOH
	(answer)
	(answer)

FOH Volume Variance

FOH Volume Variance	=Budgeted FOH- Allocated FOH
	(answer)
	(answer)

a & b

(a) 1,000 units * 2 DLHr per unit = 2,000 DLHr
(b) $ 2 per DLHr * 2,000 DLHr = $4,000

REQUIREMENT 2

The $1,600 unfavorable variable overhead cost variance indicates that actual
(answer)
(answer)
(answer)
The $600 favorable variable overhead efficiency variance indicates that
(answer)
(answer)
(answer)
The $1,500 unfavorable fixed overhead cost variance indicates that actual
(answer)
(answer)
The $2,400 favorable fixed overhead volume variance is not a cost variance
(answer)
(answer)
(answer)
(answer)
(a)

Need this example for reference

Answer 1

Calculate variable overhead cost variance
Standard cost
( Budgeted overhead/direct labor hours)
($1200/800 hours)	$1.50
Actual Cost
( Actual overhead cost/direct labor hours)
($4000/1600 hours)	$2.50
variable overhead cost variance
( Standard cost-Actual Cost)*Actual labor hours
($1.5-$2.5)*1600	-2400	unfavorable
Calculate overhead efficiency variance
variable overhead efficiency variance
(Standard direct labor hours-Actual direct labor hours)*standard cost
(800-1600)*1.5	-1200	unfavorable
Calculate Fixed overhead cost variance
Fixed overhead cost variance
(Budgeted fixed overhead-Actual fixed overhead)
(($1600-$3100)	-1500	unfavorable
Calculate Fixed overhead volume variance
Standard overhead allocation rate	(1600/800)	2
overhead allocated to production	(2*(2*1000)	4000
Fixed overhead volume variance
( Allocated fixed overheads-budgeted Fixed overheads)
($4000-$1600)	2400	favorable
1) variable overhead cost variance is unfavorable because actual cost of the variable overhead is more than budgeted overhead, as it negatively impacts the revenue, hence it is unfavorable
2)variable overhead efficiency is unfavorable because actual utilization of direct labor hours is more than budgeted hours, as over utilization of direct labor hours have impact on the efficiency of utilization of resources, hence unfavorable
3) Fixed overhead cost is unfavorable because actual fixed overhead cost is more than budgeted, as it would impact the revenue of the company, hence it is unfavorable
4) Fixed overhead volume variance is favorable because allocated overhead is more than budgeted,so, it is favorable