Concept explainers
Moleno Company produces a single product and uses a
*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. Calculate the standard fixed overhead rate and the standard variable overhead rate.
- 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance?
- 3. CONCEPTUAL CONNECTION Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each.
- 4. CONCEPTUAL CONNECTION Compute the variable overhead spending and efficiency variances. Discuss the significance of each.
1.
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:
Substitute $2,160,000 for fixed overhead cost, 120,000 units for units produced and 5 for direct labor hours in the above formula.
Therefore, the fixed overhead rate is $3.60 per direct labor hour.
Use the following formula to calculate the variable overhead rate:
Substitute $1,440,000 for variable overhead cost, 120,000 units for units produced and 5 for direct labor hours in the above formula.
Therefore, the variable overhead rate is $2.40 per direct labor hour.
2.
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:
Substitute 118,600 for units produced, 5 for direct labor hours and $3.60 for fixed overhead rate in the above formula.
Therefore, the applied fixed overhead is $2,134,000.
Use the following formula to calculate applied variable overhead:
Substitute 118,600 for units produced, 5 for direct labor hours and $2.40 for fixed overhead rate in the above formula.
Therefore, the applied variable overhead is $1,423,200.
Use the following formula to calculate total fixed overhead variance:
Substitute $2,150,000 for fixed overhead and $2,134,800 for applied fixed overhead in the above formula.
Therefore, the total fixed overhead variance is $15,600 (U).
Use the following formula to calculate total variable overhead variance:
Substitute $1,422,800 for variable overhead and $1,423,200 for applied variable overhead in the above formula.
Therefore, the total variable overhead variance is $400 (F).
3.
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:
Substitute $2,150,400 for actual fixed overhead and $2,160,000 for budgeted fixed overhead in the above formula.
Therefore, the fixed overhead spending variance is $9,600 (F).
Use the following formula to calculate volume variance:
Substitute $2,160,000 for budgeted fixed overhead variance and $2,134,800 for applied fixed overhead rate in the above formula.
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.
4.
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:
Substitute $1,422,800 for actual overhead, $2.40 for standard variable overhead and 592,300 hours for actual hours in the above formula.
Therefore, the overhead spending variance is $1,280 (U).
Use the following formula to calculate efficiency variance:
Substitute 592,300 hours for actual hours, $2.40 for standard variable overhead and $222,816 for actual overhead in the above formula.
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.
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