For May, Mariana company planned production of 12,800 units (80% of its production capacity of 16,000 units) and prepared the following overhead budget. The company applies overhead with a standard of 3 DLH per unit and a standard overhead rate of $3.79 per DLH. Overhead Budget 80% Operating Level Production (in units) 12,800 Budgeted overhead Variable overhead costs Indirect materials $23,040 Indirect labor 38,400 Power 9,600 Maintenance 3,456 Total variable overhead costs 74,496 Fixed overhead costs Rent of building 24,000 Depreciation—Machinery 16,000 Supervisory salaries 31,040 Total fixed overhead costs 71,040 Total overhead $145,536 It actually operated at 90% capacity (14,400 units) in May and incurred the following actual overhead. Actual Overhead Costs Indirect materials $23,040 Indirect labor 41,500 Power 10,800 Maintenance 7,600 Rent of building 24,000 Depreciation—Machinery 16,000 Supervisory salaries 34,000 Actual total overhead $156,940 1. Compute the overhead controllable variance and identify it as favorable or unfavorable. 2. Compute the overhead volume variance and identify it as favorable or unfavorable. 3. Prepare an overhead variance report at the actual activity level of 14,400 units.
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.
For May, Mariana company planned production of 12,800 units (80% of its production capacity of 16,000 units) and prepared the following
|
Overhead Budget |
80% Operating Level |
|
Production (in units) |
12,800 |
|
Budgeted overhead |
|
|
Variable overhead costs |
|
|
Indirect materials |
$23,040 |
|
Indirect labor |
38,400 |
|
Power |
9,600 |
|
Maintenance |
3,456 |
|
Total variable overhead costs |
74,496 |
|
Fixed overhead costs |
|
|
Rent of building |
24,000 |
|
|
16,000 |
|
Supervisory salaries |
31,040 |
|
Total fixed overhead costs |
71,040 |
|
Total overhead |
$145,536 |
It actually operated at 90% capacity (14,400 units) in May and incurred the following actual overhead.
|
Actual Overhead Costs |
|
|
Indirect materials |
$23,040 |
|
Indirect labor |
41,500 |
|
Power |
10,800 |
|
Maintenance |
7,600 |
|
Rent of building |
24,000 |
|
Depreciation—Machinery |
16,000 |
|
Supervisory salaries |
34,000 |
|
Actual total overhead |
$156,940 |
1. Compute the overhead controllable variance and identify it as favorable or unfavorable.
2. Compute the overhead volume variance and identify it as favorable or unfavorable.
3. Prepare an overhead variance report at the actual activity level of 14,400 units.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
