ABC Company produces cases of frozen food. During May, the company produced 1 500 cases of food and incurred the following actual costs: Variable overhead $ 15 000 Fixed overhead 27 000 Actual direct labour cost (8 000 direct labour hours) 151 200 Actual material cost (30 000 kilograms purchased and used) 66 000 Standard cost and annual budget information is as follows: Standard cost per case Direct labour (5 hours @ $18) $ 90.00 Direct material (20 kilograms @ $2) 40.00 Variable overhead (5 hours @ $1.50) 7.50 Fixed overhead (5 hours @ $3) 15.00 Total $152.50 Annual budget information Variable overhead $150 000 Fixed overhead $300 000 Planned activity for year 100 000 direct labour hours Required: Calculate the following variances, indicating whether each variance is favourable or unfavourable: 1. Variable overhead spending variance 2. Variable overhead efficiency variance 3. Fixed overhead budget variance 4. Fixed overhead volume 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.
ABC Company produces cases of frozen food. During May, the company produced 1 500 cases
of food and incurred the following actual costs:
Variable overhead $ 15 000
Fixed overhead 27 000
Actual direct labour cost (8 000 direct labour hours) 151 200
Actual material cost (30 000 kilograms purchased and used) 66 000
Standard cost per case
Direct labour (5 hours @ $18) $ 90.00
Direct material (20 kilograms @ $2) 40.00
Variable overhead (5 hours @ $1.50) 7.50
Fixed overhead (5 hours @ $3) 15.00
Total $152.50
Annual budget information
Variable overhead $150 000
Fixed overhead $300 000
Planned activity for year 100 000 direct labour hours
Required:
Calculate the following variances, indicating whether each variance is favourable or
unfavourable:
1. Variable overhead spending variance
2. Variable overhead efficiency variance
3. Fixed overhead
4. Fixed overhead volume variance
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