Question

Alexandria Company uses a standard costing system. At the beginning of the 2020 financial year Alexandria adopted the following standards:

	Inputs	Total
Direct materials	3 kg @ $2.50 per kg	$7.50
Direct labour	5 hrs @ $7.50 per hr	37.50
Factory overhead:
Variable	$3.00 per direct labour hour	15.00
Fixed	$4.00 per direct labour hour	20.00
Standard cost per unit		$80.00

Alexandria’s July 2019 budget was based on the denominator volume of 40,000 direct labour hours. Alexandria’s actual July production was 7,800 units. The records for July indicated the following:

Direct materials purchased	25,000kg @ $2.60/kg
Direct materials used	23,100kg
Direct labour	40,100 hours at $7.30/hour
Total actual factory overhead: Variable $125,000 Fixed $175,000	$300,000

The company’s policy is to record materials variances at the time materials are purchased.

Required

1. Compute all possible variances from the case facts for the month of July. Label each variance calculated and indicate whether each variance is favourable (F) or unfavourable (U).
2. Maggie is rushing to prepare for her ACFI2003 final exam. She cannot understand why variable overhead has an efficiency variance, but fixed overhead does not. She is puzzled why fixed overhead has a volume variance and variable overhead does not. She reasoned that, “After all, overhead is overhead. So fixed and variable overhead should have the same type of variances”. Do you agree with Maggie? Explain in full why you agree or disagree

Answer 1