Chapter 8, Problem 3PSB

To determine

Concept introduction:

Overhead rate- The overhead rate is the total of not direct costs (known as overhead) for a precise coverage period, divided by an allotment measure. The cost of overhead can contain either actual costs or forecasted costs.

Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted

Requirement 1:

Monthly overhead forecast to

Cost per unit for each variable overhead item and its total per unit costs

Fixed cost per month.

Answer to Problem 3PSB

Cost per unit for variable overhead item and total per unit cost is as follows.

Cost item variable overhead	Cost per unit$
Material (indirect)	1.50
Labour (indirect)	6
Power	1.50
Maintenance and repair	3
Total overhead cost per unit	$12

Total fixed cost per month should be as follows,

Particulars	Amount $
Total fixed cost per month	$180000

Explanation of Solution

Cost per unit for variable overhead item and total per unit cost is as follows.

Cost item variable overhead	Total cost(TC)	The volume of production expected	Cost per unit$
Material (indirect)	22500	15000	1.50
Labour (indirect)	90000	15000	6
Power	22500	15000	1.50
Maintenance and repair	45000	15000	3
Total overhead cost per unit			$12

Total fixed cost per month should be as follows,

Overhead cost per item fixed	Amount $
Depreciation-building	24000
Depreciation-machinery	72000
Insurance and taxes	18000
Supervision	66000
Total	$180000

To determine

Concept introduction:

Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted

Requirement 2:

To explain:

Flexible overhead forecast for December depicting the amount of each variable and fixed cost that is 65%, 75% and 85% level of capacity.

Answer to Problem 3PSB

Flexible forecast overhead for December.

Particulars	Unit sales forecasted for 13000	Unit sales forecasted for 15000	Unit sales forecasted for 17000
Variable cost total	156000	180000	204000
Total fixed cost	180000	180000	180000
Total overhead	$336000	$360000	$384000

Explanation of Solution

Flexible forecast overhead for December.

S company’s Flexible forecast

	Flexible	Flexible	flexible
	Per unit amount variable	Total Fixed cost	Unit sales forecasted for 13000	Unit sales forecasted for 15000	Unit sales forecasted for 17000
Overhead cost variable
Material indirect	1.50		19500	22500	25500
Labour indirect	6		78000	90000	102000
Power	1.50		19500	22500	25500
Maintenance and repair	3		39000	45000	51000
Variable cost total	12		156000	180000	204000
Overhead fixed
Depreciation-building		24000	24000	24000	24000
Depreciation-machinery		72000	72000	72000	72000
Insurance and taxes		18000	18000	18000	18000
Supervision		66000	66000	66000	66000
Total fixed cost		180000	180000	180000	180000
Total overhead			$336000	$360000	$384000

To determine

Concept introduction:

Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted

Requirement 3:

Computation of direct material cost variance, and also quantity and price variance.

Answer to Problem 3PSB

Direct material cost variance is$15900U, price variance is $ 6900U and quantity variance $9000U

Explanation of Solution

Computation as follows,

Actual material used	69000 lbs(given)
For actual production standard quantity of material	15000 units*4.5lb/unit=67500lb
Actual price	6.10/lb given
Standard price	6 /lb given

Direct material cost variance

Actual unit at actual cost(69000lbs @ 6.10)	420900
Standard units at standard cost(67500lbs @ 6)	405000
Direct material cost variance	$15900U

Direct material price variance

Price variance	=	AQ*(AP-SP)
	=	69000*(6.10-6)
	=	69000*.10
	=	$ 6900U

Direct material quantity variance

Quantity variance	=	SP*(AQ-SQ)
	=	6*(69000-67500)
	=	1500*6
	=	$9000U

To determine

Concept introduction:

Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted

Requirement 4:

Computing direct labour cost variance and also rate and efficiency variance.

Answer to Problem 3PSB

Direct labour cost variance is$10440U, efficiency variance $3600U

And rate variance is $6840U

Explanation of Solution

Computation of actual labour hours used, standard labour hours for actual production, actual labour rate and standard labour rate.

Actual hours used	22800hrs given
Standard hours for actual	15000 units*1.5hrs/unit=22500hrs
Actual rate	12.30/hr
Standard rate	12/hrs

Computation of direct labor cost variance

Actual hours at actual cost(22800hrs*12.30)	280440
Standard hours at standard cost(22500hrs*12)	270000
Direct labour cost variance	$10440U

Computation of direct labour rate variance

Rate variance	=	Actual hrs*(Actual rate −standard rate)
	=	22800*(12.30-12)
	=	22800*.30/hrs
	=	$6840U

Computation labour efficiency variance

Efficiency variance	=	Standard rate*(Actual hours-standard hours)
	=	(22800-22500) hours*12
	=	300*12
	=	$3600U

To determine

Concept introduction:

Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted

Requirement 5:

Detailed overhead variance report that shows the variance for individual item of overhead.

Answer to Problem 3PSB

Variances

Controllable variance	Forecast	Results
Overhead cost-variable
Material-indirect	22500	21600	900	F
Labour-indirect	90000	82260	7740	F
Power	22500	23100	600	U
Maintenance & Repair	45000	46800	1800	U
Variable cost total	180000	173760	6240	F
Overhead cost-fixed
Depreciation building	24000	24000	0
Depreciation machinery	72000	75000	3000	U
Insurance & taxes	18000	16500	1500	F
Supervision	66000	66000	0
Total fixed cost	180000	181500	1500	U
Overhead cost total	$360000	$355260	$4740	F

Explanation of Solution

Overhead variance report

S company
Overhead variance report
For 31st December
Volume variance
Production level expected	75% of capacity
Achieved production level	75% of capacity
Volume variance	0
	Flexible	Actual
Controllable variance	Forecast	Results	Variances
Overhead cost-variable
Material-indirect	22500	21600	900	F
Labour-indirect	90000	82260	7740	F
Power	22500	23100	600	U
Maintenance & Repair	45000	46800	1800	U
Variable cost total	180000	173760	6240	F
Overhead cost-fixed
Depreciation building	24000	24000	0
Depreciation machinery	72000	75000	3000	U
Insurance & taxes	18000	16500	1500	F
Supervision	66000	66000	0
Total fixed cost	180000	181500	1500	U
Overhead cost total	$360000	$355260	$4740	F