Patel and Sons, Inc., uses a standard cost system to apply overhead costs to units produced....

Patel and Sons, Inc., uses a standard cost system to apply overhead costs to units produced. Practical capacity for the plant is defined as 50,000 machine hours per year, which represents 25,000 units of output. Annual budgeted fixed overhead costs are $250,000 and the budgeted variable overhead cost rate is $4 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,000 units, which took 41,000 machine hours. Actual fixed overhead costs for the year amounted to $245,000 while the actual variable overhead cost per unit was $3.90.

a. Based on the information provided above, what was the fixed overhead spending (budget) variance for the year?

b. What was the fixed overhead production volume variance for the year?

c. Based on the information provided above, what was the variable overhead spending variance for the year?

d. What was the variable overhead efficiency variance for the year?

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Expert Solution

a) Fixed OH spending Var = Budgetted Fixed OH - Actual Fixed OH

= 250000-245000 = 5000 favorable

b) Fixed OH volume var = Recovered Fixed OH - Budgetted Fixed OH

Recover Rate = Budgetted Fixed OH / Budgetted Hrs = 250000/50000 = $ 5 per machine hrs

FIxed OH Vol Var = (41000*5) - 250000 = 205000 - 250000 = 45000 unfavorable

c) Variable OH spending Var = (Std rate - Actual rate) Actual Machine hrs

Budgetted Machine hrs = 50000, Budgetted Unit = 25000, So Machine Hr per Unit = 2(50000/25000) hr Budgeted Variable OH = 4 per unit, so budgeted Variable OH per machine hr = 4/2 = 2 per machine hr

Standard variable OH for 20000 units = 20000* machine hr per unit * Variable OH per machine hr = 20000*2*2 = 80000

Actual OH = 3.9*20000= 78000, Actual Machine Hrs = 41000, So Variable OH per machine hr = 78000/41000 = 1.9024

Therefore, Variable OH Spending Var = (Std OH rate per Machine hr-Actual OH rate per Mac hr)* Actual Mac Hrs

= (2-1.9024)41000 =4001.6 = 4000 approx favourable

d) Variable OH efficiency var = (Std Mac hrs - Actual mac hrs)*Std OH rate per mac hrs

= (40000-41000)*2 = 2000 unfavourable

ekkarill92 answered 11 months ago

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