Chapter 23, Problem 3AP

1.

To determine

Examine the monthly overhead budget to (a) ascertain the costs per unit for each variable overhead item and its total per unit costs, and (b) identify the total fixed costs per month.

Explanation of Solution

Overhead Budget:

Overhead budget is prepared to predict the manufacturing costs, other than direct materials and direct labor costs.

(a) Ascertain the costs per unit for each variable overhead item and its total per unit costs.

Particulars	Amount in $ (A)	Total  units to  be divided (1) (B)	Variable cost per unit                         $\left(\text{A}÷\text{B}\right)$
Variable costs :
Indirect materials	45,000	15,000	3
Indirect labor	180,000	15,000	12
Power	45,000	15,000	3
Repairs and maintenance	90,000	15,000	6
Total variable costs	360,000	15,000	24

(Table 1)

Working notes:

Calculate the factory capacity units for 75% capacity level:

$\begin{array}{c}\text{Factory capacity for 75\% = Total capacity of units }\times \text{ 75\%}\\ \text{=20,000 units }\times \text{75\%}\\ \text{=15,000 units}\end{array}$ (1)

(b) Identify the total fixed costs per month.

Particulars	Amount in $
Fixed costs (per month)
Depreciation—Building	24,000
Depreciation—Machinery	80,000
Taxes and insurance	12,000
Supervision	79,000
Total fixed costs	195,000

(Table 2)

2.

To determine

Prepare flexible overhead budgets for October showing the amounts of each variable and fixed cost at the 65%, 75%, and 85% capacity levels.

Explanation of Solution

Prepare flexible overhead budgets for October showing the amounts of each variable and fixed cost at the 65%, 75%, and 85% capacity levels.

Company A
Flexible overhead budgets
For the  month  ended October 31
	Flexible budget		Flexible	Flexible	Flexible
	Variable amount per unit in $	Total fixed cost  in $	Budget for units sales of $13,000  in $	Budget for units sales of $15,000 in $	Budget for units sales of $17,000 in $
Variable overhead costs
Indirect materials	3		39,000	45,000	51,000
Indirect labor	12		156,000	180,000	204,000
Power	3		39,000	45,000	51,000
Repairs and maintenance	6		78,000	90,000	102,000
Total variable costs	24		312,000	360,000	408,000
Fixed overhead costs
Depreciation—Building		24,000	24,000	24,000	24,000
Depreciation—Mach.		80,000	80,000	80,000	80,000
Taxes and insurance		12,000	12,000	12,000	12,000
Supervision		79,000	79,000	79,000	79,000
Total fixed costs		195,000	195,000	195,000	195,000
Total overhead costs			507,000	555,000	603,000

(Table 3)

3.

To determine

Compute the direct materials cost variance, including its price and quantity variances.

Explanation of Solution

Compute the direct materials cost variance:

Particulars	Amount in $
Direct material cost variances:
Actual units at actual cost $\left[91,000lbs.@\$5.10\right]$	464,100
Less: Standard units at standard cost $\left[90,000lbs.(2)@\$5.00\right]$	450,000
Direct material cost variance (unfavorable )	14,100

(Table 4)

Compute the direct materials price variance:

$\begin{array}{c}\text{Price variance =Actual quantity ×}\left(\text{Actual price -Standard price}\right)\\ \text{=91,000lb×}\left(\text{\$5}\text{.10-\$5}\text{.00}\right)\\ \text{=\$9,100}(unfavorable)\end{array}$

Compute the direct materials quantity variance:

$\begin{array}{c}\text{Quantity variance =}\left(\text{Actual quantity}-\text{Standard quantity}\right)\text{ × Standard price}\\ \text{=}\left(\text{91,000lb}-90,000lb(2)\right)\text{×\$5}\text{.00 per lb}\text{.}\\ \text{=\$5,000}(unfavorable)\end{array}$

Working Notes:

Calculate the standard quantity of materials:

 $\begin{array}{c}\text{Standard quantity of materials=}\left(\begin{array}{l}\text{Capacity of units for 75\% of }\\ \text{capacity level (1)}\end{array}\right)\text{×Direct material units}\\ \text{=15,000 units ×6lb}\text{./unit}\\ \text{=90,000 lb}\text{.}\end{array}$ (2)

4.

To determine

Compute the direct labor cost variance, including its rate and efficiency variances.

Explanation of Solution

Compute the direct labor cost variance:

Particulars	Amount in $
Direct labor cost variances:
Actual units at actual cost $\left[\text{30,500 hrs}.@\$17.25\right]$	526,125
Less: Standard units at standard cost $\left[\text{30,000 hrs}.(3)@\$17.00\right]$	510,000
Direct labor cost variance (unfavorable )	16,125

(Table 5)

Compute the direct labor rate variance:

$\begin{array}{c}\text{Labor Rate variance =Actual Hours ×}\left(\text{Actual Rate -Standard Rate}\right)\\ \text{=30,500 hrs×}\left(\text{\$17}\text{.25-\$17}\text{.00}\right)\\ \text{=\$7,625 unfavorable}\end{array}$

Compute the direct labor efficiency variance:

$\begin{array}{c}\text{Labor efficiency variance =}\left(\text{Actual Hours}-\text{Standard Hours }\right)\text{ × Standard rate }\\ \text{=}\left(30,500-30,000(3)\right)\text{×\$17}\text{.00 per hr}\text{.}\\ \text{=\$8,500 unfavorable}\end{array}$

Working Notes:

Calculate the standard efficiency variance:

 $\begin{array}{c}\text{Standard efficiency variance =}\left(\begin{array}{l}\text{Capacity of units for 75\% of }\\ \text{capacity level (1)}\end{array}\right)\text{×Direct labor units}\\ \text{=15,000 units ×2hr}\text{./unit}\\ \text{=30,000 hours}\end{array}$ (3)

5.

To determine

Prepare a detailed overhead variance report that shows the variances for individual items of overhead.

Explanation of Solution

Company  A
Overhead variance report
For the month ended October 31
Controllable Variance	Flexible Budget (A)	Actual results (B)	Variances (A-B)
Variable overhead costs
Indirect materials	$45,000	$44,250	$750 F
Indirect labor	$180,000	$177,750	$2,250  F
Power	$45,000	$43,000	$2,000  F
Repairs and maintenance	$90,000	$96,000	$6,000 U
Total variable costs	$360,000	$361,000	$1,000 U
Fixed overhead costs
Depreciation—Building	$24,000	$24,000	0
Depreciation—Machinery	$80,000	$75,000	$5,000  F
Taxes and insurance	$12,000	$11,500	$500  F
Supervision	$79,000	$89,000	$10,000 U
Total fixed costs	$195,000	$199,500	$4,500 U
Total overhead costs	$555,000	$560,500	5,500 U

(Table 6)

Note:

• Expected production level and production level achieved is 75%
• Favorable condition is denoted by F and Unfavorable condition is denoted by U.