Calculating factory overhead: two variances Munoz Manufacturing Co. normally produces 11,000units of product X each month. Each unit requires 2.5hours of direct labor, and factory overhead is applied on a direct labor hour basis. Fixed costs and variable costs in factory overhead at the normal capacity are $2.25and $1.25per direct labor hour, respectively. Cost and production data for May follow: Production for the month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.500units Direct labor hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..19,000hours Factory overhead incurred for: Variable costs . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. $29,000 Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,000 a. Calculate the flexible-budget variance. b. Calculate the production-volume variance. c. Was the total factory overhead under-or overapplied? By what amount?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
E8-17 Calculating factory
Munoz Manufacturing Co. normally produces 11,000units of product X each month. Each unit requires 2.5hours of direct labor, and factory overhead is applied on a direct labor hour basis. Fixed costs and variable costs in factory overhead at the normal capacity are $2.25and $1.25per direct labor hour, respectively. Cost and production data for May follow:
Production for the month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.500units
Direct labor hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..19,000hours
Factory overhead incurred for:
Variable costs . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. $29,000
Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,000
a. Calculate the flexible-
b. Calculate the production-volume variance.
c. Was the total factory overhead under-or overapplied? By what amount?
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