Asked by Elmer Trejo on May 17, 2024
Verified
Eastern Company uses a standard cost system in which manufacturing overhead is applied to units of product on the basis of standard direct labor-hours. The denominator activity level is 60,000 direct labor-hours, or 300,000 units. A standard cost card for the company's product follows:
Actual data for the year follow:
Required:
a.Compute the variable overhead rate and efficiency variances.
b. Compute the fixed manufacturing overhead budget and volume variances.
Variable Overhead Rate
The per-unit cost of overhead that changes with the level of production or activity.
Efficiency Variances
The differences between actual costs and the standard or budgeted costs based on the efficient use of resources.
Fixed Manufacturing Overhead Budget
A predetermined estimate of the total fixed costs required to support production activities, excluding variable costs directly tied to production volume.
- Determine a diversity of variances related to manufacturing overhead, consisting of budget, volume, rate, and efficiency variances.
Verified Answer
Variable overhead rate variance = (Actual hours × Actual rate) − (Actual hours × Standard rate)
= $327,240 − (64,800 direct labor-hours × $5.00 per direct labor-hour)
= $327,240 − $324,000
= $3,240 Unfavorable
Variable overhead efficiency variance = (Actual hours − Standard hours) × Standard rate
= (64,800 direct labor-hours − 66,000 direct labor-hours*) × $5.00 per direct labor-hour
= (−1,200 direct labor-hours) × $5.00 per direct labor-hour
= $6,000 Favorable
* 330,000 units × 0.20 direct labor-hour per unit = 66,000 direct labor-hours
b. Fixed overhead variances:
Budget variance = Actual fixed manufacturing overhead − Budgeted fixed manufacturing overhead
= $612,000 − $600,000
= $12,000 Unfavorable
Volume variance = Fixed component of the predetermined overhead rate × (Denominator hours − Standard hours allowed for the actual output)
= $10.00 per direct labor-hour × (60,000 direct labor-hours − 66,000 direct labor-hours)
= $10.00 per direct labor-hour × (−6,000 direct labor-hours)
= $60,000 Favorable
Learning Objectives
- Determine a diversity of variances related to manufacturing overhead, consisting of budget, volume, rate, and efficiency variances.
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