Chapter 11, Problem 11.27AE

Compute and interpret overhead variances (Learning Objectives 5 & 6)

Aloha Foods processes bags of organic frozen fruits sold at specialty grocery stores. The company allocates manufacturing overhead based on direct labor hours. Aloha has budgeted fixed manufacturing overhead for the year to be $626,000. The predetermined fixed manufacturing overhead rate is $16.20 per direct labor hour, while the standard variable manufacturing overhead rate is $0.70 per direct labor hour. The direct labor standard for each case is one-quarter (0.25) of an hour.

The company actually processed 158,000 cases of frozen organic fruits during each year and incurred $682,460 of manufacturing overhead. Of this amount, $636,000 was fixed. The company also incurred a total of 40,400 direct labor hours.

Requirements

1. 1. How much variable overhead would have been allocated to production? How much fixed overhead would have been allocated to production?
2. 2. Compute the variable MOH rate variance and the variable MOH efficiency variance. What do these variances tell managers?
3. 3. Compute the fixed MOH budget variance and the fixed overhead volume variance. What do these variances tell managers?