FUN Inc. has a fully automated production facility in which almost 97 percent of
ID: 2373291 • Letter: F
Question
FUN Inc. has a fully automated production facility in which almost 97 percent of averhead costs are driven by machine hours. As the company's cost accountant, you have computed the following overhead variances for May:
Variable overhead spending variance $34,000 F
Variable overhead efficiency variance 41,200 F
Fixed overhead spending variance 28,000 U
Fixed overhead volume variance 20,000 U
The company's president in concerned about the variance amounts and has asked you to show her how the variances were computed and to answer several questions. Budgeted fixed averhead for the month is $1,000,000; the predetermined variable and fixed overhead rates are, respectively, $20 and $40 per machine hour. Bugdeted capacity is 20,000 units.
a. Using the four-variance approach, prepare an overhead analysis in as much detail as possible.
b. What is the standard number of machine hours allowed for each unit of output?
c. How many actual hours were worked in May?
d. What is the total spending variance?
e. What additional information about the manufacturing overhead variances is gained by inserting detailed computations into the variable and fixed manufacturing overhead variance analysis?
f. How would the overhead variances be closed if the three-variance approach were used and the variances are considered insignificant?
Explanation / Answer
a. Using the four variances approach prepares an overhead analysis in much detail as possible.
Variable overhead spending variance 17,000F
Actual hours worked 22440 x rate 10 = 224,400
Less actual variable factory overhead = 207,400
Variable overhead spending variance = 17,000 F
Variable overhead efficiency variance 20,600 F
Standard hours allowed 24500 x variable rate 10 = 245,000
Less: actual hours worked 22440? x variable rate 10 = 224400
Variable overhead efficiency variance= 20600f
Fixed Overhead spending variance 14,000 u
Budgeted fixed foh 500,000
Less actual fixed foh ? 514,000
Fixed overhead spending variance = 14,000 u
Fixed overhead volume variance 10,000 u
Budgeted hours 25000 x fixed rate 20 = 500000
(500000/20)
Less standard hours ? 24500 x fixed rate 20 =?490000
Fixed overhead variance 10000 uf
b. What is the standard number of machine hours allowed for each unit of output?
24500 hours
c. How many actual hours were worked in May?
22440
d. What is the total spending variance?
$3000 F
e. How would the overhead variances be closed if the three variance approach was used?
Spending variance = 3000F
Idle capacity variance=
25000-22440 x 20 = 51200 UF
Efficiency variance
24500-22440 x 30 = 61800 f
Total variance 13600 f
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