Chapter 23, Problem 3APSA

To determine

Flexible Budget:

A flexible budget is prepared for more than one level of production and it is flexible in nature. Flexible budget can vary according to the actual level of production. It eliminates the volume variance between the budgeted values and actual result of production.

Material Price Variance:

At the actual quantity, the difference between the actual cost and standard cost is known as material price variance.

Material Quantity Variance:

The material quantity variance measures the efficiency of a production in terms of material utilization. It is computed by determining the difference between the standard quantity to used and actual quantity of material used in the production at the standard rate.

Labor Rate Variance:

At the actual direct labor hours, the variance between the actual direct labor cost based on actual rate incurred and the budgeted direct labor cost based on standard rate is called direct labor cost variance.

Direct Labor Efficiency Variance:

Direct labor efficiency variance measures the efficiency in utilization of direct labor costs by determining the difference between the actual labor hours and the direct labor hours allowed at the standard rate.

1. Determine the cost per unit of each variable overhead item and its total per unit costs and identify the total fixed costs per month.

2. Preparing flexible budgets showing the amounts of each variable and fixed cost at the 65%, 75% and 85% capacity levels.

3. Computation of direct materials cost variance, showing price and quantity variances.

4. Computation of direct labor cost variance, showing rate and efficiency variances.

5. Preparation of overhead variance report that shows the variances for individual items of overhead.

Answer to Problem 3APSA

Solution:

1. The total per unit costs is $24 and the total fixed cost per month is $195,000.

2. The total overhead cost at 65%, 75%, and 85% is $507,000, $555,000, and $603,000 respectively.

3. The direct material cost variance is $14,100 (U) with unfavorable price variance of $9,100 and quantity variance of $5,000.

4. Direct labor cost variance is $16,125 (U) with unfavorable rate variance of $7,625 and efficiency variance of $8,500.

5. Autuan Company has favorable overhead volume variance of $74,000 and unfavorable controllable variance of $5,500.

Explanation of Solution

1.

Overhead items	Variable cost per unit	Fixed cost per month
Variable overhead costs
Indirect materials	$3.00
Indirect labor	$12.00
Power	$3.00
Repairs and maintenance	$6.00
Total variable overhead costs	$24.00
Fixed overhead costs
Depreciation − Building		$24,000
Depreciation − Machinery		$80,000
Taxes and insurance		$12,000
Supervision		$79,000
Total fixed overhead costs		$195,000

AUTUAN COMPANY Flexible Overhead Budgets For the Month Ended October 31.
	Flexible Budget	Flexible Budget at Capacity Level of
Variable cost per unit	Fixed cost per month		65%	75%	85%
Production (in units)	1 unit		13,000	15,000	17,000
Variable overhead costs
Indirect materials	$3.00		$39,000	$45,000	$51,000
Indirect labor	$12.00		$156,000	$180,000	$204,000
Power	$3.00		$39,000	$45,000	$51,000
Repairs and maintenance	$6.00		$78,000	$90,000	$102,000
Total variable overhead costs	$24.00		$312,000	$360,000	$408,000
Fixed overhead costs
Depreciation − Building		$24,000	$24,000	$24,000	$24,000
Depreciation − Machinery		$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 overhead costs		$195,000	$195,000	$195,000	$195,000
Total Overhead Costs			$507,000	$555,000	$603,000
Predetermined overhead rate per standard direct labor hour				$18.50

3. Computation of direct materials cost variance, including its price and quantity variances

4. Computation of direct labor cost variance, including its rate and efficiency variances

  $\begin{array}{l}DirectLaborRateVariance=ActualHoursX\left(ActualRate–StandardRate\right)\hfill \\ =30,500hoursX\left(\$17.25-\$17.00\right)\hfill \\ =\$7,625Unfavorable\hfill \end{array}$

  $\begin{array}{l}\begin{array}{l}DirectLaborEfficiencyVariance=StandardRateX\left(ActualHours–StandardHours\right)\hfill \\ =\$17.00X\left(30,500hours–30,000hours\right)\hfill \\ =\$8,500Unfavorable\hfill \end{array}\\ \begin{array}{l}DirectLaborCostVariance\hfill \\ =DirectLaborRateVariance+DirectLaborEfficiencyVariance\hfill \\ =\$7,625+\$8,500\hfill \\ =\$16,125Unfavorable\hfill \end{array}\end{array}$

5.

AUTUAN COMPANY Overhead Variance Report For the Month Ended October 31.
Overhead Volume Variance
Expected production level	75% of capacity 15,000 units
Production level achieved	85% of capacity 17,000 units
Budgeted fixed overhead (30,000 hrs. X $18.50)	$555,000
Fixed overhead applied (34,000 hrs. X $18.50)	$629,000
Volume Variance	$74,000 F
Overhead Controllable Variance	Flexible Budget	Actual Results	Variances
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 overhead 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 overhead costs	$195,000	$199,500	$4,500 U
Total Overhead costs	$555,000	$560,500	$5,500 U

Conclusion

The labor rate variance is $7,625 Unfavorable

The direct labor efficiency variance is $8,500 Unfavorable