Question

Sharifi Hospital bases its budgets on patient-visits. The hospital's static budget for October appears below:

Budgeted number of patient-visits		7,700
Budgeted variable overhead costs:
Supplies (@$4.90 per patient-visit)	$	37,730
Laundry (@$7.90 per patient-visit)		60,830
Total variable overhead cost		98,560
Budgeted fixed overhead costs:
Wages and salaries		52,150
Occupancy costs		85,350
Total fixed overhead cost		137,500
Total budgeted overhead cost	$	236,060

The total overhead cost at an activity level of 8,400 patient-visits per month should be:

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The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below:

Sales	$	830,000
Variable expenses	$	365,000
Fixed manufacturing expenses	$	291,000
Fixed selling and administrative expenses	$	166,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

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The following labor standards have been established for a particular product:

Standard labor-hours per unit of output		8.7	hours
Standard labor rate	$	15.60	per hour

The following data pertain to operations concerning the product for the last month:

Actual hours worked		8,600	hours
Actual total labor cost	$	131,580
Actual output		850	units

What is the labor rate variance for the month?

Answer 1

1.

Activity level	8,400
Variable overhead cost:
Supplies (8,400*$4.90)	$41,160
Laundry (8,400*$7.90)	66,360
Total	107,520
Fixed overhead cost:
Wages and salaries	52,150
Occupancy costs	85,350
Total	137,500
Total manufacturing overhead costs	$245,020

The total overhead costs at an activity level of 8,400 is $245,020

2.

	Current total	Total if product LO7E is dropped	Net effect
Sales	$830,000	$0	-$830,000
Variable expenses	365,000	0	365,000
Contribution margin	465,000	0	-465,000
Fixed manufacturing expenses	291,000	105,000	186,000
Fixed selling and administrative expenses	166,000	60,000	106,000
Total	$8,000	-$165,000	-$173,000

Hence if product LO7E is dropped company will have a financial disadvantage of $173,000

3.

Labor rate variance = (Actual rate - Standard rate) * Actual hours

Labor rate variance = ($131,580/8,600 - $15.60) * 8,600

Labor rate variance = ($15.3 - $15.60) * 8,600 = $2,580 Favorable