Question

Expand Your Critical Thinking 24-02 a-d Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size. One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 1,060 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows. Standard (1,000 units) Actual (1,060 units) Indirect materials $ 14,600 $ 15,000 Indirect labor 52,400 62,200 (Fixed) Manufacturing supervisors salaries 27,400 26,800 (Fixed) Manufacturing office employees salaries 15,800 15,200 (Fixed) Engineering costs 32,900 30,500 Computer costs 12,200 12,200 Electricity 3,000 3,000 (Fixed) Manufacturing building depreciation 9,700 9,700 (Fixed) Machinery depreciation 3,600 3,600 (Fixed) Trucks and forklift depreciation 1,800 1,800 Small tools 900 1,700 (Fixed) Insurance 600 600 (Fixed) Property taxes 400 400 Total $175,300 $182,700

Calculate the 1) total overhead variance, 2) controllable variance, and 3) volume variance. (Round variable overhead to 2 decimal places and final answers to 0 decimal places, e.g. 1,575.)

Answer 1

Ana Carillo and Associates

Calculate overhead application rate –

= total standard overhead cost/direct labor hours

Standard hours = 1,000 units x 5 hours = 5,000 DLH

= $175,300/5,000 DLH = $35.06

Applied overhead to production = overhead application rate x standard hours of actual production

Standard hours of actual production = 4,500

OH rate = 4,500* $35.06= $157,770

1. Calculation of variances –

Total overhead variance --

Total overhead variance = applied overhead – actual overhead

Applied overhead = $157,770

Actual overhead = $182,700

Total overhead variance = $157,770 – $182,700= $24,930 U

Controllable variance = budgeted overhead – actual overhead

Budgeted overhead for actual production = variable overhead + fixed overhead

Variable overhead –

Total budgeted variable overhead –

Indirect materials        $ 14,600

Indirect labor              52,400

Computer costs           $12,200

Electricity                    $3,000

Small tools                  $900

Total                            $83,100

Standard hours            1,000 units x 5 hours = 5,000 DLH

Variable overhead rate = $83,100/5,000 = $16.62 per DLH

Budgeted fixed overhead = $175,300– $83,100 = $92,200

Budgeted overhead for actual production (4,500 hours) = variable overhead + fixed overhead

= ($16.60 x 4,500) + $92,200= $166,900

Actual overhead =$182,700

Controllable variance = $182,700- $166,900 = $15,800 U

Volume Variance –

= overhead applied – Budgeted overhead

Overhead applied = $157,770

Budgeted overhead = $166,900

Volume variance = $157,770– $166,900= $9,130 U

Total overhead variance $24,930 U = Controllable variance $15,800 U + Volume variance $9,130 U

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