Problem #11: Standard Costing & Variances Jake’s cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 0.50 direct labor hours to produce one unit (batch) of product, and the variable overhead rate is $5.00 per hour. Actual results are in for last year, which indicates 45,000 batches of cheese were produced and sold. The company's direct labor workforce worked 27,500 hours, and variable overhead costs totaled $144,000. Required: (1) Calculate the variable overhead spending variance.
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.
Problem #11:
Jake’s cheese Company produces gourmet cheese for resale at local grocery stores. Jake’s expected to use 0.50 direct labor hours to produce one unit (batch) of product, and the variable
Required:
(1) Calculate the variable overhead spending variance.
(2) Calculate the variable overhead efficiency variance.
(3) Suggest several possible reasons for the variable overhead spending and efficiency variances.
Solution..
Actual quantity = 45,000 batches
Standard hours per unit = 0.50
Total standard Labor hours
= Actual quantity * standard hours per unit
= 45,000 units * 0.50 hours per unit
= 22,500 hours
Actual hours = 27,500 hours
Actual variable overhead cost = $144,000
Standard variable overhead rate = $5 per hour
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