Question

Company uses standard costing. The company prepared its static budget for 2018 at 2,500,000 machine hours for the year. Total budgeted overhead cost is $33,500,000. The variable overhead rate is $11 per machine hour ($22 per unit). Actual result for 2018 as follow:

Machine-hours	2,400,000	hours
Output	1,230,000	units
Variable overhead	$27,600,000
Fixed overhead rate variance	$1,350,000	U

1.	Calculate for the fixed​ overhead:
	a.	Budgeted amount.
	b.	Budgeted cost per​ machine-hour.
	c.	Actual cost.
	d.	​Production-volume variance.
2.	Calculate the variable overhead rate variance and the variable overhead efficiency variance.
3.	Angela AustenAusten​, the​ controller, prepares the variance analysis. It is common knowledge in the company that she and Ronald BerknerBerkner​, the production​ manager, are not on the best of terms. In a recent executive committee​ meeting, BerknerBerkner had complained about the lack of usefulness of the accounting reports he receives. To get back at​ him, AustenAusten manipulated the actual fixed overhead amount by assigning a​ greater-than-normal share of allocated costs to the production area. In​ addition, she decided to depreciate all of the newly acquired production equipment using the​ double-declining-balance method rather than the​ straight-line method, contrary to company practice. As a​ result, there was a sizable unfavourable fixed overhead rate variance. She boasted to one of her​ confidants, "I am just returning the​ favour." Discuss AustenAusten​'s actions and their ramifications.

Answer 1

a. Budgeted Fixed Overhead = Total Budgeted overhead - Budgeted Variable overhead

= $33,500,000 - 2,500,000 machine hours * $11 per machine hour

= $6,000,000

b. Fixed overhead budgeted cost per machine hour = $6,000,000 / 2,500,000 machine hours

= $2.4

c.

Fixed overhead rate variance = $1,350,000 U

=> (budgeted fixed overhead rate - actual fixed ovrhead rate ) * actual machine hours = -1,350,000

=> (2.4 - actual fixed ovrhead rate) * 2,400,000 = -1,350,000

=> actual fixed ovrhead rate = 1.8375

Therefore,

Actual Fixed Overhead cost = actual fixed ovrhead rate * actual machine hours = 1.8375 * 2,400,000 = $4,410,000

d. Fixed Overhead Production-volume variance. = Budgeted Fixed Overhead - Allocated fixed overhead

= $6,000,000 - $2.4*2,400,000

= $240,000 U

2. Variable overhead rate variance = (SR - AR) * AH = (11 - $27,600,000 / 2,400,000) 2,400,000 = 1,200,000 U

variable overhead efficiency variance = (SH-AH) * AR

= (22/11* 1,230,000 units - 2,400,000) * $27,600,000 / 2,400,000

= $690,000 F

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