Question

Emden Capital Company offers financial services to its clients.​ Recently, Emden has experienced rapid growth and has increased both its client base and the variety of services it offers. The company is becoming concerned about its rising​ costs, however, particularly related to technology overhead. The technology budget for Emden and its actual results for the first quarter of 2017 are given​ below:

Client interations 18,000 Fixed Overhead $59,400 Variable Overhead 5,400 CPU units @ $1.80 per CPU unit Client interactions 20,000 Fixed Overhead $58,000 Variable Overhead $20,800 CPU Units used 8,000

1. Calculate the variable overhead spending and efficiency​ variances, and indicate whether each is favorable​ (F) or unfavorable​ (U). 2. Calculate the fixed overhead spending and​ production-volume variances, and indicate whether each is favorable​ (F) or unfavorable​ (U). 3. Comment on Emden ​Capital's overhead variances. In your​ view, is the firm right to be worried about its control over technology​ spending?

Answer 1

1.) Determine Variable Overhead Spending Variance :-

(Standard Rate - Actual Rate) * Actual Hours = ($1.8 - $2.6) * 8000 = $6,400 . The 2.6 is calculated by dividing the cpu units used by the variable overhead incurred. Since the Standard rate is more than the actual rate, the result is an Unfavorable Variable overhead spending variance.

Variable Overhead Efficiency Variance :-

Standard Rate * (Budgeted CPU Units - Actual CPU Units) = $1.80 * (5,400 - 8,000) = $1.80 * 2600 = $4,680 Unfavourable Overhead efficiency variance. Since the actual CPU units used are more than the budgeted CPU units, the result is an unfavourable variable overhead efficiency variance.

2.) Fixed Overhead Spending Variance :- Actual Fixed Overheads - Budgeted fixed overheads = $58,000 - $59,400 = $1,400 Favorable Fixed overheads spending variance. Since the actual fixed expenses are lesser than the budgeted fixed overheads, the result is a Favorable fixed overhead spending variance.

Production Volume Variance :-

(actual units produced - budgeted production units) x budgeted fixed overhead rate per unit

Budgeted Fixed overhead rate per unit = $59,400/18000 units = $3.3 per unit

= (20,000 - 18,000) * 3.3

=$6,600. The variance is a favorable Production volume variance because the actual units producted is higher than the budgeted production units

3.) Comments on the company's position :-

As can be seen above, the company has a favorable variance in the Production volume and the Fixed Overheads spending. However, with respect to Variable Overhead variances, we observed that the company has a unfavorable variance for both Variable Overhead spending and the Variable efficiency variance .

Therefore , it is in the best interest of the firm/company, that they address the reasons for these including finding out alternative solutions or improved efficient models of services so that they can reduce the variances for these expenses and achieve a positive variance.