Chapter 11, Problem 11.2BYP

Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak. and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets arc a standard size.

One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

	Standard (1,000 units)	Actual (900 units)
Indirect materials	$ 12,000	$ 12,300
Indirect labor	43,000	51,000
(Fixed) Manufacturing, supervisors salaries	22,500	22,000
(Fixed) Manufacturing office employees salaries	13,000	12,500
(Fixed) Engineering costs	27,000	25,000
Computer costs	10,000	10,000
Electricity	2,500	2,500
(Fixed) Manufacturing building depreciation	8,000	8,000
(Fixed) Machinery depreciation	3,000	3,000
(Fixed) Trucks and forklift depreciation	1, 500	1,500
Small tools	700	1,400
(Fixed) Insurance	500	500
(Fixed) Property taxes	300	300
Total	$144,000	$150,000

Instructions

(a) Determine the overhead application rate.

(b) Determine how much overhead was applied to production.

(c) Calculate the total overhead variance, controllable variance, and volume variance.

(d) Decide which overhead variances should be investigated.

(e) Discuss causes of the overhead variances. What can management do to improve its performance next month?