Question

The Starr Company has established a standard cost system for the manufacture of a single consumer product, which is branded under the name Vinbit. The standard costs of producing one Vinbit are shown below:

Standard Cost Card:

Direct Materials: 20 pounds @ $.30                                         $6.00

Direct Labor: 3 hours @ $15.00                                             $45.00

At the beginning of the year, Starr Company established a monthly flexible overhead budget as follows:

Flexible Overhead Budget:

Variable Charges - $.60 per direct labor hour

Fixed Charges - $5,000.00 per month

Budgeted Volume – 10,000 direct labor hours      

The costs of operations to produce 4,500 Vinbits during May are stated below (there were no initial inventories):

            Actual Costs:

            Materials purchased: 110,000 pounds @ $.31                    $34,100

            Materials used: 105,000 pounds

            Direct Labor: 13,750 hours @ $15.20                                 $209,000

            Variable overhead incurred                                                     $8,500

            Fixed overhead incurred                                                          $6,000   

1. Starr Company’s overhead is applied through the use of direct labor hours as the single cost driver. Utilizing this cost driver, what is the amount of budgeted volume, standard volume and actual volume?

2. Prepare a calculation of the overhead efficiency, volume and spending variances for the month of May.

Answer 1

1)

Budgeted Volume = Budgeted hours / Budget hour per unit

= 10,000/3

= 3,333 units

Standard Volume = Budgeted hours / Actual Hours per unit

= 10,000 / (13,750/4500)

= 10,000 / 3.05

= 3,278 units

Actual Volume = 4,500 units

2)

• Fixed Overhead Efficiency Variance(FOEV)

FOEV = Recovered Fixed Overhead - Standard Fixed Overhead

Recovered Fixed Overhead = Standard Rate per hour * Standard Hour for Actual Output

= (6,000/10,000) * 4,500 *3

= 0.60 * 4500 *3

= 8,100

Standard Overhead = Standard rate per unit * Standard output for actual time

= (6,000/3,333) * {(Budgeted Output / Budgeted Hours) * Actual Hours}

= 1.8 * {(3,333/10,000)* 13,750}

= 1.8 * 4,582.875

= 8,249.175 or 8,250 units

* Budgeted Output = 10,000/3 = 3,333 units

FOEV = 8,100 - 8,250 = 150 Adverse

• Fixed Overhead Spending Variance (FOSV)

FOSV = Budgeted Overhead - Actual Overhead

= 6,000 -6,000

= 0

• Fixed Overhead Volume Variance (FOVV)

FOVV = Recovered Fixed Overheads - Budgeted Fixed Overheads

= 8,100 - 5,000 = 3,100

• Variable Overhead Spending Variance (VOSV)

VOSV = Actual Time * (Standard Overhead Rate - Actual Overhead Rate)

= 13,750 * {0.60 - (8500/13,750)}

= 13,750 * (0.60 - 0.618)

= 13,750 * 0.018

= $250 Adverse

• Variable Overhead Efficiency Variance (VOEV)

VOEV = Standard Overhead Rate * (Standard time for actual Output - Actual Time)

= 0.60 * {(4500*3) - 13750}

= 0.60 * (13500-13750)

= 0.60 * (250)

= $150 Adverse