MANAGERIAL ANALYSIS BYP22-2 Al Finney and Associates is a medium-sized company l

Question

MANAGERIAL ANALYSIS BYP22-2 Al Finney 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 900 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 Actual (1,000 units) (900 units) Indirect materials $12,000 $12,300 Indirect labor 43,000 51,000 (Fixed) Manufacturing supervisors salaries 22,000 22,000 (Fixed) Manufacturing office employees salaries 13,000 11,500 (Fixed) Engineering costs 27,000 25,000 Computer costs 10,000 10,000 Electricity 2,500 2,500 (Fixed) Manufacturing building depreciation 8,000 8,000 (Fixed) Machinery depreciation 3,000 3,000 (Fixed) Trucks and forklift depreciation 1,500 1,500 Small tools 700 1,400 (Fixed) Insurance 500 500 (Fixed) Property taxes 300 300 Total $143,500 $149,000 Instructions (a) Determine the overhead application rate. (b) Determine how much overhead was applied to production. (c) Calculate the total overhead variance, controllable variance, and volume variance. (d) Decide which overhead variances should be investigated. (e) Discuss causes of the overhead variances. What can management do to improve its performance next month?

Explanation / Answer

(a) Determine the overhead application rate.    Overhead rate = Budgeted Overheads / Budgeted labor hours = $143,500 / 5,000 $28.70 Per Hour (b) Determine how much overhead was applied to production. Overhead applied = Actual labor hours x Overhead rate = 4,000 x $28.70 $1,14,800 (c) Calculate the total overhead variance, controllable variance, and volume variance. Total Overhead Variance = Actual Overhead - Overhead applied = $149,000 - 114,800 $34,200 Overhead Controllable Variance = Actual Overhead - Budgeted overhead on Budgeted hours = $149,000 - (4,500 x 28.70) $19,850 Overhead Volume Variance = Budgeted Overhead - Overhead Applied = 143,500 - 114,800 28700 (d) Decide which overhead variances should be investigated. All the variances are required to be investigated, wheather the variance is small or big. However, the company may decide an amount above which the variance should be investigated. (e) Discuss causes of the overhead variances. What can management do to improve its performance next month? The causes of variance may be wrong budgeting or incrase / decrease in, price of the material / service. There may be over / under uses of material, Labor or taxes / charges.                                      The management should do detailed workings for budgeting and an effort should be made to prepare the budget close to actual costs.

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