Concept explainers
Concept introduction:
Overhead rate- The overhead rate is the total of not direct costs (known as overhead) for a precise coverage period, divided by an allotment measure. The cost of overhead can contain either actual costs or forecasted costs.
Elastic (flexible) overhead
Requirement 1:
Monthly overhead forecast to
Cost per unit for each variable overhead item and its total per unit costs
Fixed cost per month.
Answer to Problem 3PSB
Cost per unit for variable overhead item and total per unit cost is as follows.
Cost item variable overhead | Cost per unit$ |
Material (indirect) | 1.50 |
Labour (indirect) | 6 |
Power | 1.50 |
Maintenance and repair | 3 |
Total overhead cost per unit | $12 |
Total fixed cost per month should be as follows,
Particulars | Amount $ |
Total fixed cost per month | $180000 |
Explanation of Solution
Cost per unit for variable overhead item and total per unit cost is as follows.
Cost item variable overhead | Total cost(TC) | The volume of production expected | Cost per unit$ |
Material (indirect) | 22500 | 15000 | 1.50 |
Labour (indirect) | 90000 | 15000 | 6 |
Power | 22500 | 15000 | 1.50 |
Maintenance and repair | 45000 | 15000 | 3 |
Total overhead cost per unit | $12 |
Total fixed cost per month should be as follows,
Overhead cost per item fixed | Amount $ |
24000 | |
Depreciation-machinery | 72000 |
Insurance and taxes | 18000 |
Supervision | 66000 |
Total | $180000 |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 2:
To explain:
Flexible overhead forecast for December depicting the amount of each variable and fixed cost that is 65%, 75% and 85% level of capacity.
Answer to Problem 3PSB
Flexible forecast overhead for December.
Particulars | Unit sales forecasted for 13000 | Unit sales forecasted for 15000 | Unit sales forecasted for 17000 |
Variable cost total | 156000 | 180000 | 204000 |
Total fixed cost | 180000 | 180000 | 180000 |
Total overhead | $336000 | $360000 | $384000 |
Explanation of Solution
Flexible forecast overhead for December.
Flexible | Flexible | flexible | |||
Per unit amount variable | Total Fixed cost | Unit sales forecasted for 13000 | Unit sales forecasted for 15000 | Unit sales forecasted for 17000 | |
Overhead cost variable | |||||
Material indirect | 1.50 | 19500 | 22500 | 25500 | |
Labour indirect | 6 | 78000 | 90000 | 102000 | |
Power | 1.50 | 19500 | 22500 | 25500 | |
Maintenance and repair | 3 | 39000 | 45000 | 51000 | |
Variable cost total | 12 | 156000 | 180000 | 204000 | |
Overhead fixed | |||||
Depreciation-building | 24000 | 24000 | 24000 | 24000 | |
Depreciation-machinery | 72000 | 72000 | 72000 | 72000 | |
Insurance and taxes | 18000 | 18000 | 18000 | 18000 | |
Supervision | 66000 | 66000 | 66000 | 66000 | |
Total fixed cost | 180000 | 180000 | 180000 | 180000 | |
Total overhead | $336000 | $360000 | $384000 |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 3:
Computation of direct material cost variance, and also quantity and price variance.
Answer to Problem 3PSB
Direct material cost variance is$15900U, price variance is $ 6900U and quantity variance $9000U
Explanation of Solution
Computation as follows,
Actual material used | 69000 lbs(given) |
For actual production standard quantity of material | 15000 units*4.5lb/unit=67500lb |
Actual price | 6.10/lb given |
Standard price | 6 /lb given |
Direct material cost variance
Actual unit at actual cost(69000lbs @ 6.10) | 420900 |
Standard units at |
405000 |
Direct material cost variance | $15900U |
Direct material price variance
Price variance | = | AQ*(AP-SP) |
= | 69000*(6.10-6) | |
= | 69000*.10 | |
= | $ 6900U |
Direct material quantity variance
Quantity variance | = | SP*(AQ-SQ) |
= | 6*(69000-67500) | |
= | 1500*6 | |
= | $9000U |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 4:
Computing direct labour cost variance and also rate and efficiency variance.
Answer to Problem 3PSB
Direct labour cost variance is$10440U, efficiency variance $3600U
And rate variance is $6840U
Explanation of Solution
Computation of actual labour hours used, standard labour hours for actual production, actual labour rate and standard labour rate.
Actual hours used | 22800hrs given |
Standard hours for actual | 15000 units*1.5hrs/unit=22500hrs |
Actual rate | 12.30/hr |
Standard rate | 12/hrs |
Computation of direct labor cost variance
Actual hours at actual cost(22800hrs*12.30) | 280440 |
Standard hours at standard cost(22500hrs*12) | 270000 |
Direct labour cost variance | $10440U |
Computation of direct labour rate variance
Rate variance | = | Actual hrs*(Actual rate −standard rate) |
= | 22800*(12.30-12) | |
= | 22800*.30/hrs | |
= | $6840U |
Computation labour efficiency variance
Efficiency variance | = | Standard rate*(Actual hours-standard hours) |
= | (22800-22500) hours*12 | |
= | 300*12 | |
= | $3600U |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 5:
Detailed overhead variance report that shows the variance for individual item of overhead.
Answer to Problem 3PSB
Controllable variance | Forecast | Results | ||
Overhead cost-variable | ||||
Material-indirect | 22500 | 21600 | 900 | F |
Labour-indirect | 90000 | 82260 | 7740 | F |
Power | 22500 | 23100 | 600 | U |
Maintenance & Repair | 45000 | 46800 | 1800 | U |
Variable cost total | 180000 | 173760 | 6240 | F |
Overhead cost-fixed | ||||
Depreciation building | 24000 | 24000 | 0 | |
Depreciation machinery | 72000 | 75000 | 3000 | U |
Insurance & taxes | 18000 | 16500 | 1500 | F |
Supervision | 66000 | 66000 | 0 | |
Total fixed cost | 180000 | 181500 | 1500 | U |
Overhead cost total | $360000 | $355260 | $4740 | F |
Explanation of Solution
Overhead variance report
S company | |||||
Overhead variance report | |||||
For 31st December | |||||
Volume variance | |||||
Production level expected | 75% of capacity | ||||
Achieved production level | 75% of capacity | ||||
Volume variance | 0 | ||||
Flexible | Actual | ||||
Controllable variance | Forecast | Results | Variances | ||
Overhead cost-variable | |||||
Material-indirect | 22500 | 21600 | 900 | F | |
Labour-indirect | 90000 | 82260 | 7740 | F | |
Power | 22500 | 23100 | 600 | U | |
Maintenance & Repair | 45000 | 46800 | 1800 | U | |
Variable cost total | 180000 | 173760 | 6240 | F | |
Overhead cost-fixed | |||||
Depreciation building | 24000 | 24000 | 0 | ||
Depreciation machinery | 72000 | 75000 | 3000 | U | |
Insurance & taxes | 18000 | 16500 | 1500 | F | |
Supervision | 66000 | 66000 | 0 | ||
Total fixed cost | 180000 | 181500 | 1500 | U | |
Overhead cost total | $360000 | $355260 | $4740 | F |
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Chapter 8 Solutions
MANAGERIAL ACCOUNTING ACCT 2302 >IC<
- Business Specialty, Inc., manufactures two staplers: small and regular. The standard quantities of direct labor and direct materials per unit for the year are as follows: The standard price paid per pound of direct materials is 1.60. The standard rate for labor is 8.00. Overhead is applied on the basis of direct labor hours. A plantwide rate is used. Budgeted overhead for the year is as follows: The company expects to work 12,000 direct labor hours during the year; standard overhead rates are computed using this activity level. For every small stapler produced, the company produces two regular staplers. Actual operating data for the year are as follows: a. Units produced: small staplers, 35,000; regular staplers, 70,000. b. Direct materials purchased and used: 56,000 pounds at 1.5513,000 for the small stapler and 43,000 for the regular stapler. There were no beginning or ending direct materials inventories. c. Direct labor: 14,800 hours3,600 hours for the small stapler and 11,200 hours for the regular stapler. Total cost of direct labor: 114,700. d. Variable overhead: 607,500. e. Fixed overhead: 350,000. Required: 1. Prepare a standard cost sheet showing the unit cost for each product. 2. Compute the direct materials price and usage variances for each product. Prepare journal entries to record direct materials activity. 3. Compute the direct labor rate and efficiency variances for each product. Prepare journal entries to record direct labor activity. 4. Compute the variances for fixed and variable overhead. Prepare journal entries to record overhead activity. All variances are closed to Cost of Goods Sold. 5. Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total direct materials and direct labor usage variances? Explain.arrow_forwardSalisbury Bottle Company manufactures plastic two-liter bottles for the beverage industry. The cost standards per 100 two-liter bottles are as follows: At the beginning of March, Salisburys management planned to produce 500,000 bottles. The actual number of bottles produced for March was 525,000 bottles. The actual costs for March of the current year were as follows: a. Prepare the March manufacturing standard cost budget (direct labor, direct materials, and factory overhead) for Salisbury, assuming planned production. b. Prepare a budget performance report for manufacturing costs, showing the total cost variances for direct materials, direct labor, and factory overhead for March. c. Interpret the budget performance report.arrow_forwardDouglas Davis, controller for Marston, Inc., prepared the following budget for manufacturing costs at two different levels of activity for 20X1: During 20X1, Marston worked a total of 80,000 direct labor hours, used 250,000 machine hours, made 32,000 moves, and performed 120 batch inspections. The following actual costs were incurred: Marston applies overhead using rates based on direct labor hours, machine hours, number of moves, and number of batches. The second level of activity (the right column in the preceding table) is the practical level of activity (the available activity for resources acquired in advance of usage) and is used to compute predetermined overhead pool rates. Required: 1. Prepare a performance report for Marstons manufacturing costs in the current year. 2. Assume that one of the products produced by Marston is budgeted to use 10,000 direct labor hours, 15,000 machine hours, and 500 moves and will be produced in five batches. A total of 10,000 units will be produced during the year. Calculate the budgeted unit manufacturing cost. 3. One of Marstons managers said the following: Budgeting at the activity level makes a lot of sense. It really helps us manage costs better. But the previous budget really needs to provide more detailed information. For example, I know that the moving materials activity involves the use of forklifts and operators, and this information is lost when only the total cost of the activity for various levels of output is reported. We have four forklifts, each capable of providing 10,000 moves per year. We lease these forklifts for five years, at 10,000 per year. Furthermore, for our two shifts, we need up to eight operators if we run all four forklifts. Each operator is paid a salary of 30,000 per year. Also, I know that fuel costs about 0.25 per move. Assuming that these are the only three items, expand the detail of the flexible budget for moving materials to reveal the cost of these three resource items for 20,000 moves and 40,000 moves, respectively. Based on these comments, explain how this additional information can help Marston better manage its costs. (Especially consider how activity-based budgeting may provide useful information for non-value-added activities.)arrow_forward
- A company estimates its manufacturing overhead will be $840,000 for the next year. What is the predetermined overhead rate given each of the following Independent allocation bases? Budgeted direct labor hours: 90,615 Budgeted direct labor expense: $750000 Estimated machine hours: 150,000arrow_forwardShinto Corp. uses a standard cost system and manufactures one product. The variable costs per product follow: Budgeted fixed overhead costs for the month are $4,000, and Shinto expected to manufacture 2,000 units. Actual production, however, was only 1,800 units. Materials prices were 10% over standard, and labor rates were 5% over standard. Of the factory overhead expense, only 80% was used, and fixed overhead was $100 over budget. The actual variable overhead cost was $4,800. In materials usage, 8% more parts were used than were allowed for actual production by the standard, and 6% more labor hours were used than were allowed. Required: Calculate the materials and labor variances. Calculate the variances for overhead by the four-variance method. (Hint: First compute the fixed and variable overhead rates per hour.)arrow_forwardNashler Company has the following budgeted variable costs per unit produced: Budgeted fixed overhead costs per month include supervision of 98,000, depreciation of 76,000, and other overhead of 245,000. Required: 1. Prepare a flexible budget for all costs of production for the following levels of production: 160,000 units, 170,000 units, and 175,000 units. 2. What is the per-unit total product cost for each of the production levels from Requirement 1? (Round each unit cost to the nearest cent.) 3. What if Nashler Companys cost of maintenance rose to 0.22 per unit? How would that affect the unit product costs calculated in Requirement 2?arrow_forward
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- 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. 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.arrow_forwardJillian Manufacturing Inc. manufactures a single product and uses a standard cost system. The factory overhead is applied on the basis of direct labor hours. A condensed version of the company’s flexible budget follows: The product requires 3 lb of materials at a standard cost of $5 per pound and 2 hours of direct labor at a standard cost of $10 per hour. For the current year, the company planned to operate at the level of 6,250 direct labor hours and to produce 3,125 units of product. Actual production and costs for the year follow: Required: For the current year, compute the factory overhead rate that will be used for production. Show the variable and fixed components that make up the total predetermined rate to be used. Prepare a standard cost card for the product. Show the individual elements of the overhead rate as well as the total rate. Compute (a) standard hours allowed for production and (b) under- or overapplied factory overhead for the year. Determine the reason for any under- or overapplied factory overhead for the year by computing all variances, using each of the following methods: Two-variance method Three-variance method (appendix) Four-variance method (appendix)arrow_forwardFlaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows: During the year, the company had the following activity: Actual fixed overhead was 12,000 less than budgeted fixed overhead. Budgeted variable overhead was 5,000 less than the actual variable overhead. The company used an expected actual activity level of 12,000 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold. Required: 1. Compute the unit cost using (a) absorption costing and (b) variable costing. 2. Prepare an absorption-costing income statement. 3. Prepare a variable-costing income statement. 4. Reconcile the difference between the two income statements.arrow_forward
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