Chapter 11 Flexible Budgets and Overhead Analysis 569 11-39 Overhead Variance An

Question

Chapter 11 Flexible Budgets and Overhead Analysis 569 11-39 Overhead Variance Analysis OBJECTIVE m plant of Morril's Small Motor Division produces a major subassembly for a and control. The standard cost sheet for the subassembly follows: 6.0 The sepower motor for lawn mowers. The plant uses a standard costing system for production costing Direct materials (6.0 kg@ s5) Direct labour (1.6 hrs.@$12) Variable overhead (1.6 hrs.@$10) Fixed overhead (1.6 hrs. @$6 Standard unit cost $30.00 19.20 16.00 9.60 $74.80 During the year, the Chatham plant had the following actual production activity: . Production of motors totalled 50,000 units h The c Actual fixed overhead totalled $556,000 d. Actual variable overhead totalled $860,000. The Chatham plant's practical activity is 60,000 units per year. Standard overhead rates are com- puted based on practical activity measured in standard direct labour hours company used 82,000 direct labour hours at a total cost of S1,066,000. Required: . Compute the variable overhead spending and efficiency variances 2. CONCEPTUAL CONNECTION Compute the fixed overhead spending and volume vari Check figure: 1. VOH efficiency v $20,000 U ances. Interpret the volume variance. What can be done to reduce this variance?

Explanation / Answer

Vraiable OH rate per hour Std: $10 per hour Std Hour allowed per unit: 1.6 hours Actual Output: 50000 units Std hours allowed(50000*1.6): 80,000 hours Actual hours: 82000 hours Actual Rat per hour (860,000/82000): 10.49 per hour Variable Spending OH variance: Actual hours (Std variable OH rate per hour-Actual variable OH per hour) 82,000 hours (10-10.49) = 40,000 U Variable efficiency variance: Std rate per hour (Std hours-Actual hours) 1.60 (80000-82000): 3200 U Fixed OH Budgeted: (60000 units *9.60) 576000 Std Fixed OH (50000 units*9.60) 480000 Actual Fixed OH 556,000 Fixed OH spending Variance: Budgeted Fixeed OH - Actual Fixed OH 576000 - 556000 =20,000 F Fixed OH Volume variance: Std Fixed OH for actual output-Budgeted Fixed oH 480,000 - 576000 = 96000U Volume variance is Unfavorable for the reson only that the actual production is quite less than number of units planned. This could be improved by taking the level to the budgeted production.

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