Chapter 10, Problem 72P

Moleno Company produces a single product and uses a standard cost system. The normal production volume is 120,000 units; each unit requires 5 direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead for the coming year is as follows:

*At normal volume.

During the year, Moleno produced 118,600 units, worked 592,300 direct labor hours, and incurred actual fixed overhead costs of $2,150,400 and actual variable overhead costs of $1,422,800.

Required:

1. 1. Calculate the standard fixed overhead rate and the standard variable overhead rate.
2. 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance?
3. 3. CONCEPTUAL CONNECTION Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each.
4. 4. CONCEPTUAL CONNECTION Compute the variable overhead spending and efficiency variances. Discuss the significance of each.

To determine

Compute the value of standard fixed overhead rate and standard variable rate.

Explanation of Solution

Overhead Variance:

The amount obtained when actual overhead is deducted from applied overhead is known as overhead variance. Overhead variance is calculated to find whether the overhead is over applied or under applied.

Use the following formula to calculate the fixed overhead rate:

$\text{Fixed Overhead Rate}=\frac{\text{Fixed Overhead Cost}}{\text{Units produced}\times \text{Direct Labor Hours}}$

Substitute $2,160,000 for fixed overhead cost, 120,000 units for units produced and 5 for direct labor hours in the above formula.

$\begin{array}{c}\text{Fixed Overhead Rate}=\frac{\text{\$2,160,000}}{120,000\times \text{5hours}}\\ =\$3.6\text{0 per direct labor hour}\end{array}$

Therefore, the fixed overhead rate is $3.60 per direct labor hour.

Use the following formula to calculate the variable overhead rate:

$\text{Variable Overhead Rate}=\frac{\text{Variable Overhead Cost}}{\text{Units produced}\times \text{Direct Labor Hours}}$

Substitute $1,440,000 for variable overhead cost, 120,000 units for units produced and 5 for direct labor hours in the above formula.

$\begin{array}{c}\text{Variable Overhead Rate}=\frac{\text{\$1,440,000}}{120,000\times \text{5hours}}\\ =\$2.4\text{0 per direct labor hour}\end{array}$

Therefore, the variable overhead rate is $2.40 per direct labor hour.

To determine

Calculate the value of applied fixed overhead and applied variable overhead. Also, calculate the value of total fixed overhead variance.

Explanation of Solution

Use the following formula to calculate applied fixed overhead:

$\text{Applied Fixed Overhead }=\left[\begin{array}{c}\text{Units Produced}\times \text{Direct Labor Hours}\\ \times \text{Fixed Overhead Rate}\end{array}\right]$

Substitute 118,600 for units produced, 5 for direct labor hours and $3.60 for fixed overhead rate in the above formula.

$\begin{array}{c}\text{Applied Fixed Overhead }=118,600\times 5\times 3.60\\ =\$2,134,800\end{array}$

Therefore, the applied fixed overhead is $2,134,000.

Use the following formula to calculate applied variable overhead:

$\text{Applied Variable Overhead }=\left[\begin{array}{c}\text{Units Produced}\times \text{Direct Labor Hours}\\ \times \text{Variable Overhead Rate}\end{array}\right]$

Substitute 118,600 for units produced, 5 for direct labor hours and $2.40 for fixed overhead rate in the above formula.

$\begin{array}{c}\text{Applied Variable Overhead }=118,600\times 5\times 2.40\\ =\$1,423,200\end{array}$

Therefore, the applied variable overhead is $1,423,200.

Use the following formula to calculate total fixed overhead variance:

$\text{Total Fixed Overhead Variance}=\text{Fixed Overhead}-\text{Applied Fixed Overhead}$

Substitute $2,150,000 for fixed overhead and $2,134,800 for applied fixed overhead in the above formula.

$\begin{array}{c}\text{Total Fixed Overhead Variance}=\text{\$2,150,400}-\$2,134,800\\ =\$15,600\left(\text{U}\right)\end{array}$

Therefore, the total fixed overhead variance is $15,600 (U).

Use the following formula to calculate total variable overhead variance:

$\text{Total Variable Overhead Variance}=\text{Variable Overhead}-\text{Applied Variable Overhead}$

Substitute $1,422,800 for variable overhead and $1,423,200 for applied variable overhead in the above formula.

$\begin{array}{c}\text{Total Variable Overhead Variance}=\$1,422,800-\$1,423,200\\ =\$400\left(\text{F}\right)\end{array}$

Therefore, the total variable overhead variance is $400 (F).

To determine

Divide the total fixed overhead variance into a spending variance and a volume variance. Also, explain the significance of each variance.

Explanation of Solution

Use the following formula to calculate fixed overhead spending variance with the help of columnar approach:

$\text{Fixed Overhead Spending Variance}=\text{Actual Fixed Overhead}-\text{Budgeted Fixed Overhead}$

Substitute $2,150,400 for actual fixed overhead and $2,160,000 for budgeted fixed overhead in the above formula.

$\begin{array}{c}\text{Fixed Overhead Spending Variance}=\$2,150,400-\text{\$2,160,000}\\ =\text{\$9,600}\left(\text{F}\right)\end{array}$

Therefore, the fixed overhead spending variance is $9,600 (F).

Use the following formula to calculate volume variance:

$\text{Volume Variance}=\text{Budgeted Fixed Overhead Variance}-\text{Applied Fixed Overhead}$

Substitute $2,160,000 for budgeted fixed overhead variance and $2,134,800 for applied fixed overhead rate in the above formula.

$\begin{array}{c}\text{Volume Variance}=\text{\$2,160,000}-\$2,134,800\\ =\$25,200\left(\text{U}\right)\end{array}$

Therefore, the volume variance by columnar approach is $25,200(U).

The difference between the planned costs and actual costs is spending variance. This variance need to be analyzed to identify scope for reducing cost. On the contrary, volume variance represents the loss or profit that is incurred at the time of producing a product which is different from the expected level.

To determine

Calculate the value of variable overhead spending and efficiency variances. Also, explain the significance of each variance.

Explanation of Solution

Use the following formula to calculate overhead spending variance:

$\text{Overhead Spending Variance}=\left[\begin{array}{c}\text{Actual Overhead}\\ -\left(\text{Actual Hours}\times \text{Standard Variable Overhead}\right)\end{array}\right]$

Substitute $1,422,800 for actual overhead, $2.40 for standard variable overhead and 592,300 hours for actual hours in the above formula.

$\begin{array}{c}\text{Overhead Spending Variance}=\$1,422,800-\left(592,300\text{ hours}\times \$2.40\right)\\ =\$1,280\left(\text{U}\right)\end{array}$

Therefore, the overhead spending variance is $1,280 (U).

Use the following formula to calculate efficiency variance:

$\begin{array}{c}\text{Efficiency Variance}=\left(\text{Actual Hours}\times \text{Standard Variable Overhead}\right)\\ -\left(\text{Applied Variable Overhead }\right)\end{array}$

Substitute 592,300 hours for actual hours, $2.40 for standard variable overhead and $222,816 for actual overhead in the above formula.

$\begin{array}{c}\text{Effeciency Variance}=\left(592,300\text{ hours}\times \$2.40\right)-\left(\text{\$1,423,200}\right)\\ =\$1,680\left(\text{F}\right)\end{array}$

Therefore, the efficiency variance is $1,680 (F).

The difference between the actual variable overhead costs and the budgeted costs for the actual hours is known as the variable overhead spending variance. On the contrary, variable overhead efficiency variance represents the savings which is related with the efficiency of labor usage.