Question

Wuhan Company’s costing system has two direct-cost categories: Direct Materials and Direct Labor. Management evaluates the Direct Materials Department by keeping purchases separate from production for variance analysis purposes. Manufacturing overhead (both variable and fixed) is allocated on the basis of Direct Labor-hours.

Budget (standard) amounts for the current period are as follows: Budget (Standard) Amount / Input Direct Materials 2 lbs. at $7.50 per lb. Direct Labor 1.30 hrs. at $25 per hr. Variable Mfg. Overhead $ 105,300 Fixed Mfg. Overhead $ 35,100 Units 4,500 Wuhan’s

Actual results for the current period are as follows: Direct materials purchased 8,000 lbs. Direct materials used in production 9,100 lbs. Direct materials cost $7.75 / lb. Direct labor rate $27.50 per hour Direct labor cost $199,375 Variable overhead rate $20.00 / DL Hour Fixed overhead cost $40,000 Units produced 5,000 units

a. Compute a three-column variance analysis of variable manufacturing overhead including all variance descriptions.

b. Compute a three-column variance analysis of fixed manufacturing overhead including variance descriptions. Indicate if FOH is over or under allocated.

c. Provide an important insight about the Production Volume Variance based on the results of your financial analysis above.

Answer 1

Answer	Information provided	Budget/Standard			Actual
		Qty	Rate	Amount	Qty	Rate	Amount
	Direct Material	2 lbs	$           8		8000 lbs	7.75	$          62,000
	Direct Labour	1.3 hours	$        25		7250 hours	27.5	$        199,375
					(199375/27.5)
	Variable Overhead	5850 hours	$        18	$          105,300	7250 hours	20	$        145,000
		(1.3 hours*4500 units)
	Fixed Overhead	5850 hours	$           6	$            35,100	7250 hours	5.5	$          40,000
	Units			4500			5000
		Actual Variable overhead costs			Actual hours at Standard Rate			Standard Variable overhead cost
	Variable Manufacturing Overhead	7250 hours	20	145000	7250 hours	18	130500	5850	18	105300
	Variable overhead Spending Variance	(Actual Rate-Standard Rate)*Actual Hours
		(20-18)*7250
		145000-130500
		14500 Unfavourable
	Variable Overhead Efficiency Variance	(Actual hours-Standard hours)*Standard Rate
		(7250-5850)*18
		25200 Unfavourable
	Variable Overhead Total Variance	Actual Overhead-Standard Overhead
		145000-105300
		39700 Unfavourable
		Actual Fixed overhead costs			Actual hours at Standard Rate			Standard Fixed overhead cost
	Fixed Manufacturing Overhead	7250 hours		40000	7250 hours	$             6	43500	5850	$       6.00	35100
	Fixed overhead Spending Variance	Actual-Standard
		40000-43500
		3500	Favourable
	Fixed Overhead Efficiency Variance	(Actual hours-Standard hours)*Standard Rate
		(7250-5850)*6
		8400 Unfavourable
	Fixed Overhead Total Variance	Actual Overhead-Standard Overhead
		40000-35100
		4900 Unfavourable
	Fixed overhead is underallocated as budegted cost is lower than the actual fixed overhead costs.
	Budgeted Predetermined overhead rate	35100/5850
	(Budgeted Fixed overhead/Budgeted labour hours)	$                   6.00	per hour
	Production Volume Variance	(Actual no of units-Budgeted no. of units)*Budgeted predetermined overhead rate
		(5000-4500)*6
		$                 3,000
	The difference of $3000 as production volume variance signifies the saving by producing additional number of units with the same allocated overhead budget.