Question

Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size. One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

Standard (1,000 units) Actual (900 units)

Indirect materials $ 12,000 $ 12,300

Indirect labor   43,000   51,000

(Fixed) Manufacturing supervisors salaries   22,500   22,000

(Fixed) Manufacturing office employees salaries   13,000   12,500

(Fixed) Engineering costs   27,000   25,000

Computer costs   10,000   10,000 Electricity    2,500    2,500

(Fixed) Manufacturing building depreciation    8,000    8,000

(Fixed) Machinery depreciation    3,000    3,000

(Fixed) Trucks and forklift depreciation    1,500    1,500 Small tools      700    1,400

(Fixed) Insurance      500      500

(Fixed) Property taxes      300      300

Total $144,000 $150,000

Instructions

a. Determine the overhead application rate.

b. Determine how much overhead was applied to production.

c. Calculate the total overhead variance, controllable variance, and volume variance.

d. Decide which overhead variances should be investigated.

e. Discuss causes of the overhead variances. What can management do to improve its performance next month?

Answer 1

a) Overhead application rate.

= budgeted overhead cost / Budgeted labour hours

= 144000/(1000*5)

= 144000/5000

=28.8

b) Overhead applied to production

= Overhead application rate * labour hours allowed

= 28.8 * 4500

= 129600

c)  total overhead variance

= Budgeted overhead - Actual Overhead

= 144000- 150000

= 6000 Unfavourable

controllable variance

= Overhead applied - Actual Overhead

= 129600 - 150000

= 20400 unfavourable

Volume Variance

= Budgeted overhead - applied overhead

= 144000 -129000

= 14400 Favourable

d)

Normally Unfavourable Variances are to be investigated. since the Controllable variance is adverse(unfavourable)  it should be Investigated. And also volume variance should also be investigated even though it is favourable the favourable may have occurred due to wrong estimation or budget and require correction.

e)

from the above data, it can be concluded that the variable overhead like ( Indirect material, Indirect Labour) are not as per budget. Even though the labours hours used were 4000 for 4500 hours allowed it is $ 7000 more. It may be due to employing more skilled labours which are paid at a higher rate. similarly, the indirect material rate is also high a detail investigation has to be done to find the actual reasons. The management has to reduce indirect material and labour charge to improve performance.