Question

Ricardo (Pvt) Ltd manufactures a single product which a standard cost of $80 made up as follows:

Direct materials:                                                          $

15 square meters @ $3/m²                                                       45

Direct labour 5 hours @ $4/hr.                                   20

Variable overheads 5hr @ $2/hr                                 10

Fixed overheads 5 hr @ $1/hr                                     5

                                                                                  $80

The standard selling price of the product is $100 per unit. The monthly budget projects production and sales of 1 000 units.

Actual figures for the month of April are as follows:

Sales 1 200 units at @ $102

Production 1 400 units

Direct materials 22 000m² at $4/m²

Direct wages 6 800 hours at $5

Variable overheads $11 000

Fixed overheads $6 000

Required calculate the following variance

1. Fixed overhead cost variance

2. Fixed overhead expenditure variance

3. Fixed overhead volume variance

4. Fixed overhead capacity variance and Fixed overhead efficiency variance

Answer 1

1. Budgeted hours = Budgeted units x number of hours per unit

= 1000 units x 5 hours per unit

= 5000 hours

2. Actual hours (given) = 6800 hours

3. Standard hours = Expected time for actual output

= Actual units produced x budgeted number of hours per unit

= 1400 units x 5 hours per unit

= 7000 hours

4. Budgeted overheads = Budgeted hours x fixed overhead recovery rate

= 5000 hrs x $1 per hour

= $5000

5. Actual overheads (given) = $6000

6. Standard overheads = Standard hours x fixed overhead recovery rate

= 7000 hours x $1 per hour

= $7000

i. Fixed overhead cost variance = Standard overhead - Actual overhead

= $7000 - $6000

= $1000 (F)

ii. Fixed overhead expenditure variance = Budgeted overheads - Actual overheads

= $5000 - $6000

= $1000 (U)

iii. Fixed overhead volume variance = Standard overheads - Budgeted overheads

= $7000 - $5000

= $2000 (F)

iv. Fixed overhead capacity variance = ( Actual hours - Budgeted hours ) x Fixed overhead recovery rate

= (6800 - 5000) x $ 1 per hour

= $1800 (F)

Fixed overhead efficiency variance = ( Standard hour - Actual hour ) x Fixed overhead recovery rate

= ( 7000 - 6800 ) x $1 per hour

= $ 200 (F)