Case 12-66 (Part Level Submission) You have started working as a cost accountant

Question

Case 12-66 (Part Level Submission)

You have started working as a cost accountant for a firm that has only been in business for one month. The firm is able to buy a new type of biodegradable plastic at a fixed price of $100 per roll. The plastic is then cut and sealed to make garbage bags. Fixed factory overhead is estimated to be $125,000 per month. During this past month, 8,000 cartons of garbage bags were produced, which represents 80% of the activity volume. You are given the following information:

Calculate the following:

Fixed overhead volume variance $___________ favourable, unfavourable, neither

Rolls of plastic used 40 Variable overhead incurred $61,000 Overhead efficiency variance $5,000 U Standard costs per carton of garbage bags: Labour hours 2 Wage rate $8 per hour Total overhead $20 Rolls of plastic 0.004 rolls

Explanation / Answer

Fixed Overhead Volume Variance = (Actual Output - Budgeted Output) X Fixed Overhead Absorption Rate per Unit Fixed Overhead Absorption Rate per Unit = $125,000 (Fixed Overhead) / 10,000 Cartons (Budgeted Output) Fixed Overhead Absorption Rate per Unit = $12.50 per Carton Budgeted Output = 8,000 Cartons (Actual Production) / 80% Budgeted Output = 10,000 Cartons Fixed Overhead Volume Variance = (8,000 Cartons - 10,000 Cartons) X $12.50 Fixed Overhead Volume Variance = $25,000 (U)

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