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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Factory overhead variance corrections

 The data related to Shunda Enterprises Inc.’s factory overhead cost for the production of 100,000 units of product are as follows:

Actual: Variable factory overhead $458,000
  Fixed factory overhead 494,000
Standard: 132,000 hrs. at $7.30 ($3.50 for variable factory overhead) 963,600

 Productive capacity at 100% of normal was 130,000 hours, and the factory overhead cost budgeted at the level of 132,000 standard hours was $956,000. Based on these data, the chief cost accountant prepared the following variance analysis:

Variable factory overhead controllable variance:
Actual variable factory overhead cost incurred $458,000  
Budgeted variable factory overhead for 132,000 hours 462,000  
Variance—favorable   $(4,000)
Fixed factory overhead volume variance:
Normal productive capacity at 100% 130.000 hrs.  
Standard for amount produced 132,000  
Productive capacity not used 2.000 hrs.  
Standard variable factory overhead rate × $7.30  
Variance—unfavorable   14,600
Total factory overhead cost variance—unfavorable   $10,600

 Identify the errors in the factory overhead cost variance analysis.

To determine

Variable factory overhead controllable variances:

The difference between the actual variable overhead costs and the standard overhead for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

Variable factory overheadcontrollable variance}(Actual variable factory overheadStandard variable factory overhead )

Fixed factory overhead volume variances:

Factory overhead volume variances refers to the difference between the budgeted fixed overheads at 100% of normal capacity, and the standard fixed overheads for the actual units produced. The factory overhead volume variances can be calculated as follows:

Fixed factory overheadvolume variance}(Standard hours for 100% ofnormal capacityStandardhours for actual units produced)×(Fixed factory overhead rate)

To identify: The errors in the factory overhead cost variance analysis.

Explanation

The errors in the factory overhead cost variance analysis are as follows:

  • In the fixed factory overhead volume variance, instead of deducting an amount of $3.80 (4) as the standard hours for actual units produced, an amount of $7.30 was deducted from the standard hours for 100% of normal capacity by the chief cost accountant.
  • This error resulted in the unfavorable fixed factory overhead volume variance of $14,600, instead of the correct favorable fixed factory overhead volume variance of $(7,600).
  • This also resulted in an unfavorable total factory overhead cost variance of $10,600, instead of the correct favorable total factory overhead cost variance of $(11,600).

Working Notes:

Determine the correct variable factory overhead controllable variance.

Variable factory overheadcontrollable variance}(Actual variable factory overheadStandard variable factory overhead (2) )=$458,000$462,000=$(4,000) (1)

Determine the standard variable factory overhead.

Standard variablefactory overhead}=[Standard hours at actual production×Variable factory overhead rate]=$132,000×$3.50=$462,000

(2)

Determine the correct fixed factory overhead volume variance.

Fixed factory overheadvolume variance}(Standard hours for 100% ofnormal capacityStandard hoursfor actual units produced)×(Fixed factory overhead rate (4))=(130,000 hours132,000hours×$3

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