Question

(CPA) The following information relates to the manufacturing operations of Herman Company for March:

Actual total overhead costs $178,000

Flexible-budge formula based on machine-hours (MH) $110,000 + $0.50 per MH

Budgeted total overhead cost rate per MH $1.50 per MH

Total overhead spending variance $8,000 unfavorable

Production-volume variance $5,000 favorable

Herman uses the 3-variance analysis of overhead costs.

a. Compute the actual machine-hours used.

b. Compute the budgeted machine-hours allowed for actual output produced.

Answer 1

Solution

a) Let X = Actual machine-hours used:

Actual Costs Incurred = Budgeted FOH Rate+ (Actual Input Incurred x Budgeted VOH Rate)+TOH spending variance

$178,000 = $110,000 + $0.50X + $8,000

$ 178,000 - $ 8,000 = $110,000 + $ 0.50X

$0.50X = 178,000- & 8,000 -$ 110,000

X = 120,000 machine hours

Because the TOH spending variance is unfavorable, in the equation it is subtracted from the actual costs incurred to equal the flexible-budget amount of $110,000 + $0.50X

b) Let Y = Budgeted machine-hours allowed for actual output produced:

= Same Budgeted Lump- Allocated: Budgeted Input Allowed for Sum Regardless of Actual Output Output Level x Budgeted Rate

$110,000 = $1.50Y - $0.50Y - $5,000

$115,000 = $1.00Y

Y = 115,000 machine-hours

Because the production-volume variance is favorable, in the equation it is added to the flexible budget amount of $110,000 to equal the FOH allocated amount of $1.50Y- $0.50Y.

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